FRAND: Samsung Electronics v ZTE Corp.
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| Lord Justice Meade Author: Judicial Office (England and Wales) Licence: OGL V.3.0, Source: Wikimedia Commons |
Renewal Negotiations
Samsung and ZTE started to negotiate for the renewal of their previous licence agreement in the middle of 2023. The previous agreement contained a covenant that neither party would sue the other for one year after its termination, though there was some dispute as to its scope. The parties agreed that the terms of the new licence should be based on comparables, but they disagreed on which comparables should apply. Samsung argued that either the terms of the parties' previous licence or those of a licence that ZTE had made with Apple in 2020 were appropriate. ZTE objected that it had been forced by US sanctions to contract on non-FRAND terms with both Samsung and Apple. Instead, ZTE proposed that the renewed licence should be based on agreements that Samsung had made with Ericsson in 2021, Nokia in 2023 and InterDigital in 2025. Samsung argued that the sum due to ZTE should not exceed US$200 million, whereas ZTE contended for a payment of US$731 million.The UK Litigation
On 19 Dec 2024, Samsung issued proceedings against ZTE in the Patents Court alleging infringement of several of its standard essential patents ("SEPs"). It also sought declarations of non-infringement and non-essentiality of several ZTE patents. Finally, it asked the court to determine the terms of a FRAND licence covering Samsung's and ZTE's respective portfolios.
The Chinese Litigation
ZTE responded on 24 Dec 2024 by issuing proceedings out of the Intermediate People's Court of Chongqing Municipality for a determination of the terms of a global FRAND cross-licence between the parties covering the entirety of their respective portfolios of cellular SEPs. On 16 Jan 2025, ZTE started infringement proceedings against Samsung in Hangzhou. These were later transferred to Chongqing. Samsung unsuccessfully challenged the jurisdiction of the Chongqing court, after which it brought infringement proceedings against Samsung in China.
Other Litigation
There have been proceedings between the parties relating to the same subject matter in Brazil, Germany, the United States and the Unified Patent Court.
Applicable Principles
The judge referred to Mr Justice Birss's judgment in Unwired Planet v. Huawei [2017] EWHC 711 (Pat), Mr Justice Mellor's in InterDigital v. Lenovo [2023] EWHC 539 (Pat) and Mr Justice Marcus Smith's in Optis v. Apple (Trial E) [2023] EWHC 1095 (Ch). He noted that all three had been scrutinised on appeal. He observed that FRAND terms were not defined in the ETSI IPR Policy, but there was a substantial body of case law addressing what such terms entailed which Lord Justice Arnold summarised in InterDigital v. Lenovo [2024] EWCA Civ 743:
"[7] Standards are set by standards-development organisations ("SDOs"), also known as standards-setting organisations ("SSOs"), such as ETSI. SDOs such as ETSI typically have an intellectual property rights ("IPR") policy which requires companies participating in the development of a new standard to declare when technical proposals they contribute are covered by SEPs (or, more usually at that stage, applications for SEPs). A patent is said to be standard-essential if implementation of the standard would necessarily involve infringement of the patent in the absence of a licence. Once a proposal is declared to be covered by a SEP, the patentee is required to give an irrevocable undertaking to grant licences of the SEP on FRAND terms. If the patentee declines to give such an undertaking, the proposal is not incorporated into the standard and some other technology is used instead. In this way a balance is struck between the interests of patentees and of implementers. Patentees are ensured a fair reward for the use of their inventions, and implementers are guaranteed access to those inventions at a fair price. This balance is in the public interest, because it encourages patentees to permit their inventions to be incorporated into standards and it encourages implementers to implement those standards. Because standards are global in nature, and are implemented by businesses which trade globally, the obligation to license SEPs on FRAND terms is also a global one.
[8] In order to make IPR policies involving the licensing of SEPs on FRAND terms fully succeed, there are two particular potential evils that must be avoided. Although terminology is not entirely consistent, these evils are generally known as "hold up" and "hold out" respectively. In simple terms, "hold up" occurs if a patentee is able to ensure that a SEP is incorporated into a standard and implemented by implementers in circumstances which enable the patentee to use the threat of an injunction to restrain infringement to extract licence terms, and in particular royalty rates, which exceed the reasonable market value of a licence of the patented invention (i.e. treating the SEP as akin to a "ransom strip" of land). "Hold out" occurs if an implementer is able to implement a technical solution covered by a SEP without paying the reasonable market value for a licence (or perhaps anything at all). It will be appreciated that the FRAND undertaking is designed to prevent hold up by giving the implementer a defence to a claim for infringement and hence to an injunction, while the patentee's ability to obtain an injunction to restrain infringement of a SEP by an implementer which is an unwilling licensee should prevent hold out.
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FRAND as a process
[39] Although the expression "FRAND" primarily refers to a result, it has been increasingly recognised since the decision of the Court of Justice of the European Union in Case C-170/13 Huawei Technologies Co Ltd v ZTE Corp [EU:C:2015:477] that FRAND is also a process. As can be seen from paragraph 28 above, this point has been endorsed by the Supreme Court. What this means is that a SEP holder is required to behave consistently with its obligation to grant a licence on FRAND terms, and an implementer is required to behave consistently with its need to take a licence on FRAND terms. Thus the SEP holder should not behave in a manner which promotes hold up, and the implementer should not behave in a manner which promotes hold out. On the contrary, both parties should attempt in good faith to negotiate terms which are FRAND.
Willing licensor and willing licensee
[40]. It is common ground that FRAND terms are those that would be agreed by a willing licensor of a portfolio of SEPs and a willing licensee of that portfolio. The concepts of a willing licensor and a willing licensee are very well established in the field of intellectual property licensing, and it is unnecessary for present purposes to elaborate upon them. In the present context, for the reasons given above, a willing licensor is one not intent on hold up and a willing licensee is one not intent on hold out. Because FRAND terms are those that would be agreed by a willing licensor and a willing licensee, it is immaterial whether the SEP owner in question is in fact willing to license on those terms or whether the implementer is in fact willing to take a licence on those terms: such willingness only affects the availability of an injunction once the court has determined what terms are FRAND. Still less is it relevant whether the SEP owner or the implementer has previously acted as a willing licensor or licensee."
[39] Although the expression "FRAND" primarily refers to a result, it has been increasingly recognised since the decision of the Court of Justice of the European Union in Case C-170/13 Huawei Technologies Co Ltd v ZTE Corp [EU:C:2015:477] that FRAND is also a process. As can be seen from paragraph 28 above, this point has been endorsed by the Supreme Court. What this means is that a SEP holder is required to behave consistently with its obligation to grant a licence on FRAND terms, and an implementer is required to behave consistently with its need to take a licence on FRAND terms. Thus the SEP holder should not behave in a manner which promotes hold up, and the implementer should not behave in a manner which promotes hold out. On the contrary, both parties should attempt in good faith to negotiate terms which are FRAND.
Willing licensor and willing licensee
[40]. It is common ground that FRAND terms are those that would be agreed by a willing licensor of a portfolio of SEPs and a willing licensee of that portfolio. The concepts of a willing licensor and a willing licensee are very well established in the field of intellectual property licensing, and it is unnecessary for present purposes to elaborate upon them. In the present context, for the reasons given above, a willing licensor is one not intent on hold up and a willing licensee is one not intent on hold out. Because FRAND terms are those that would be agreed by a willing licensor and a willing licensee, it is immaterial whether the SEP owner in question is in fact willing to license on those terms or whether the implementer is in fact willing to take a licence on those terms: such willingness only affects the availability of an injunction once the court has determined what terms are FRAND. Still less is it relevant whether the SEP owner or the implementer has previously acted as a willing licensor or licensee."
Mr Justice Meade also found Lord Justice Birss's judgment in Optis v. Apple (Trial E) [2025] EWCA Civ 552 helpful:
"[53]. This lengthy sub-section [in the judgment of the trial judge] contains discussions about the meaning of FRAND, some economic concepts and references to case law. Some of the material has been stated in other cases and is uncontroversial but there are a number of statements here which I do not agree with, such as the suggestion at [439] that there is "very close alignment" between a price that exceeds FRAND and a price that infringes a Chapter II prohibition. However save for two points this section no longer matters and there is no need to address it further. The first point is the suggestion that the FRAND question concerns value "to the implementer" (see the emphasis in [452](vi) and (vii)). The question primarily concerns value to implementers in general, and it is also relevant to take the particular implementer's circumstances into account in some respects. So, in this case, it is appropriate (and no longer contested) that for Apple with a high selling price which is not derived from the standards, a FRAND rate is not derived in ad valorem terms but is an amount of money, as the judge identifies at [452](vii). However in the end the valuation exercise is not concerned with a particular implementer, it is concerned with the value of the licensed property itself.
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[118]. In my judgment the distinction drawn is unhelpful and led the judge into error. When one is explaining the reasons why the FRAND system has been introduced, part of that explanation involves the identification of the twin concepts of hold up and hold out. In the language of the Supreme Court in UPSC hold out is a "mischief" ([10]). Furthermore at [12] the Supreme Court describes the purpose of the FRAND undertaking given by a SEP holder as being to protect (my emphasis) implementers and ETSI from hold up, while [59] also explains there is a balance: to protect implementers from hold up and SEP holders from hold out. In other words both hold up and hold out are behaviours by one party, mischiefs, which the other party is to be protected from; and this underpins the FRAND system itself. However each is plainly a matter of degree and this use of negative language is different from the question whether either mischief is intrinsically unlawful or illegitimate. In this context that is an irrelevant question. In a claim for breach of competition law such as abuse of dominance, it may well be that an act of hold up could itself be unlawful but although an allegation of that kind was made in this case, it is not the context in which this debate arises.
[119] The relevant context is the court's task of identifying a rate which is FRAND. As a matter of principle that is a rate which a willing licensee and willing licensor would agree. This is an idealised legal standard. Willing licensees do not engage in hold out to any degree and willing licensors do not engage in hold up to any degree either. Neither party needs to be protected from the behaviour of the other. By contrast real parties negotiate as hard as they can. The purpose of the willing licensee/willing licensor standard is not to measure the legitimacy or illegitimacy of a party's conduct in negotiations. A finding that a degree of hold up or hold out was involved in a given real negotiation is not a finding that either party has acted in an unlawful manner. It is simply a finding that that outcome cannot be taken as the FRAND rate. It may be close to it or far away, and if a view can be taken about the degree of hold up or hold out involved that might shed some light, but these are different issues."
[119] The relevant context is the court's task of identifying a rate which is FRAND. As a matter of principle that is a rate which a willing licensee and willing licensor would agree. This is an idealised legal standard. Willing licensees do not engage in hold out to any degree and willing licensors do not engage in hold up to any degree either. Neither party needs to be protected from the behaviour of the other. By contrast real parties negotiate as hard as they can. The purpose of the willing licensee/willing licensor standard is not to measure the legitimacy or illegitimacy of a party's conduct in negotiations. A finding that a degree of hold up or hold out was involved in a given real negotiation is not a finding that either party has acted in an unlawful manner. It is simply a finding that that outcome cannot be taken as the FRAND rate. It may be close to it or far away, and if a view can be taken about the degree of hold up or hold out involved that might shed some light, but these are different issues."
Mr Justice Meade interjected at para [92] of his judgment in Samsung Electronics Co Ltd and another v ZTE Corporation and others:
"The terms "hold-out" and "hold-up" in this field are often used to imply wrongdoing, though, and to try to avoid this I think the more neutral term "non-FRAND" is useful."
As for non-discrimination, his lordship cited para [137] of Lord Justice Arnold's judgment in Lenovo v. Ericsson [2025] EWCA Civ 182:
"I would add that the non-discrimination aspect of the FRAND obligation is not about courts being even-handed between SEP owner and implementer. It is about ensuring that the SEP owner does not discriminate between implementers who are similarly situated: see UPSC at [103]-[127]."
As to the role of commercial practice when assessing FRAND terms, the learned judge pointed to para [62] of the Supreme Court's judgment in Unwired Planet v. Huawei [2020] UKSC 37:
Comparables
As the identification and use of comparables was central to the trial, Mr Justice Meade considered the following principles. In InterDigital v. Lenovo [2024] EWCA Civ 743 Lord Justice Arnold had said:
[41]. It is well established that, in seeking to determine what terms would be agreed by a willing licensor and a willing licensee of an intellectual property right, the best guide, where it is available, is a comparable licence for the right in question. There are three common problems with this exercise. The first is that the different ways in which licence terms are expressed in different licences may make it difficult to compare their economic effects. This may make it necessary to "unpack" the licences to enable comparison between them. This is particularly true where a lump sum rather than a running royalty has been paid. The second problem is that other licences which have been agreed may not be precisely comparable to the licence under consideration. This may make it necessary for adjustments to be made to the terms of most comparable licence(s) in order to arrive at appropriate terms for the licence under consideration. The third problem, which can be regarded as an aspect of the second problem, is that licences relied upon as being comparable may not have been entered into by truly willing licensors and willing licensees, or at least not by willing licensors and willing licensees who were appropriately situated. This may be because the licences have been entered into under some form of compulsion or pressure, or it may be because they were affected by some market distortion which should be disregarded for the purposes of the assessment. See UPHC at [170]-[176]."
Mr Justice Meade noted that the Lord Justice Arnold had elaborated on that principle in Optis v. Apple (Trial E) [2025] EWCA Civ 552:
"[35-. The other set of findings [in the judgment of the trial judge] has an introductory part at [229] and then an important section from [288] to [319]. Starting at [229] the use of comparable licences is identified as a tool. A passage from UPHC on comparables is set out (UPHC [172] to [176]) which includes a well known quotation about identifying the closest comparable. That quotation was from a patent licence of right case in the Court of Appeal: Smith Kline & French Laboratories Ltd's (Cimetidine) Patents [1990] RPC 203 (Lloyd LJ) as follows:
'The object of the comparability exercise, in this as in any other branch of the law, is to find the closest possible parallel. If there is an exact parallel, there is no point in looking any further. If there are slight differences, an allowance may be made. But once you have found your comparables, whether one or more, which enable you to arrive at the appropriate figure, it would surely be erroneous to modify that figure by reference to other cases which are not truly comparable at all, so as to bring the case into line with a predetermined range. This was, with great respect, the mistake which the hearing officer made.'
[36] To this I will add two short extracts from the longer passage in UPHC referred to:
'[173] ... In my judgment, if a group of comparables are at least potentially as relevant as each other and are not the same, it is not right to elevate a small subset above the others. That is also not what Lloyd LJ in Cimetidine said one must do; instead, he said that, assuming there is no exact parallel, once true comparables have been determined one should be careful not to dilute them by reference to other cases which are not truly comparable at all. Mr Bezant's general approach does not do this.
[174] If a group of good comparables corroborate one another then no doubt that is a factor to take into account but equally if apparently good comparables, when properly understood, contain different rates that is also relevant too.'
[37] I will come back to this issue.
[38]. Starting at [288] the judge comes to two crucial conclusions. The first is that both parties were wrongly adopting what the judgment called an "exclusionary" approach to comparable licences ([288]-[291]). What this refers to is the approach familiar from previous cases (and referred to by Lloyd LJ in Cimetidine and by me in the cited passage from UPHC) of picking out the best comparable licences from the pool of available evidence. Picking out the best necessarily leads to what the judge called exclusion of the others.
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[90] The other dimension to this issue is a distinction between the comparability of a licence and the reliability of the evidence arising from it. On a number of occasions the judge referred to the task of unpacking, which the experts undertook, as being to render licences comparable. Of course in a very general sense that is true, but this case has drawn attention to a useful distinction which as far as I am aware has not been identified with clarity before. Comparability in the sense of a licence being a good parallel, as referred to by Lloyd LJ in Cimetidine, is primarily concerned with the situation of the parties and the subject matter being licensed. So in a case like this about a FRAND licence for Apple handsets, a licence by the SEP holder of the same portfolio albeit to a different handset manufacturer is likely to be the place to start to identify the best comparable. The extent to which licences are affected by hold up or hold out will also have an impact on their comparability. However this kind of comparability has nothing to do with whether the licence terms involve lump sums or ad valorem or DPU royalties. Thus it can be seen that the accountancy experts are not best placed to express a view about this kind of comparability. Comparability itself will be a matter for the judge to decide based on evaluation of all the evidence, which may well include fact evidence about the situations of the various parties and so on. Unpacking does not alter that sort of comparability at all.
[91]. On the other hand reliability is concerned with the quality of the information derived from a given licence, perhaps involving unpacking in various respects. With this distinction in mind, unpacking is not concerned with making a licence more or less comparable in the sense I have described it, it is about improving the reliability of the comparison.
[92]. As an approach, the 'comparables approach' is the one described in Cimetidine. Therefore the fact either expert adopted a comparables approach on instructions is no criticism. It is an appropriate approach in law. As accountancy experts they might well need to be instructed as to which licences they should consider. They were unlikely to be able to comment on comparability of individual licences as I have defined it, but they could and did comment on the quality of the data which can be gleaned from the licences - in other words they commented on reliability and were entitled to do so. An example to which we had our attention drawn was paragraph 6.51 of Ms Gutteridge's report of 14 January 2022 in which she explained that given the uncertainty in the evidence about certain factors, one of which was past releases, she was unable to adjust for such a factor but could only observe its directional impact.
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[95] Before leaving this topic I will say a bit more about starting from the SEP holder's own licences. I maintain that this is the place to start but that is all it is. Factors like hold out and hold up may well render licences of the same portfolio less good as comparables. In this case there are also licences to the putative licensee (Apple). Such licences are capable of being useful comparables, again subject to hold up and hold out, but using them also involves a further dimension which is why, although they may well be useful in the end, they are not the best place to start. Their comparability (not reliability) also depends on the relationship between the patent portfolio being licensed and the SEP holder's portfolio. Not only does one need a view about stack shares, the issue of portfolio quality arises. It is not enough to render them comparable to say that the SEP holder's portfolio is average. The other licensed portfolios also have to examined.
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[114] Whether adjusted as Apple submits or not, the judge's approach is an example of exactly the technique which Lloyd LJ warned against in Cimetidine because it involves using less good comparables to modify a result from better ones. In my judgment it is flawed. I would therefore allow the appeal on ground 1 and reject respondent's notice ground 1."
"[35-. The other set of findings [in the judgment of the trial judge] has an introductory part at [229] and then an important section from [288] to [319]. Starting at [229] the use of comparable licences is identified as a tool. A passage from UPHC on comparables is set out (UPHC [172] to [176]) which includes a well known quotation about identifying the closest comparable. That quotation was from a patent licence of right case in the Court of Appeal: Smith Kline & French Laboratories Ltd's (Cimetidine) Patents [1990] RPC 203 (Lloyd LJ) as follows:
'The object of the comparability exercise, in this as in any other branch of the law, is to find the closest possible parallel. If there is an exact parallel, there is no point in looking any further. If there are slight differences, an allowance may be made. But once you have found your comparables, whether one or more, which enable you to arrive at the appropriate figure, it would surely be erroneous to modify that figure by reference to other cases which are not truly comparable at all, so as to bring the case into line with a predetermined range. This was, with great respect, the mistake which the hearing officer made.'
[36] To this I will add two short extracts from the longer passage in UPHC referred to:
'[173] ... In my judgment, if a group of comparables are at least potentially as relevant as each other and are not the same, it is not right to elevate a small subset above the others. That is also not what Lloyd LJ in Cimetidine said one must do; instead, he said that, assuming there is no exact parallel, once true comparables have been determined one should be careful not to dilute them by reference to other cases which are not truly comparable at all. Mr Bezant's general approach does not do this.
[174] If a group of good comparables corroborate one another then no doubt that is a factor to take into account but equally if apparently good comparables, when properly understood, contain different rates that is also relevant too.'
[37] I will come back to this issue.
[38]. Starting at [288] the judge comes to two crucial conclusions. The first is that both parties were wrongly adopting what the judgment called an "exclusionary" approach to comparable licences ([288]-[291]). What this refers to is the approach familiar from previous cases (and referred to by Lloyd LJ in Cimetidine and by me in the cited passage from UPHC) of picking out the best comparable licences from the pool of available evidence. Picking out the best necessarily leads to what the judge called exclusion of the others.
...
[90] The other dimension to this issue is a distinction between the comparability of a licence and the reliability of the evidence arising from it. On a number of occasions the judge referred to the task of unpacking, which the experts undertook, as being to render licences comparable. Of course in a very general sense that is true, but this case has drawn attention to a useful distinction which as far as I am aware has not been identified with clarity before. Comparability in the sense of a licence being a good parallel, as referred to by Lloyd LJ in Cimetidine, is primarily concerned with the situation of the parties and the subject matter being licensed. So in a case like this about a FRAND licence for Apple handsets, a licence by the SEP holder of the same portfolio albeit to a different handset manufacturer is likely to be the place to start to identify the best comparable. The extent to which licences are affected by hold up or hold out will also have an impact on their comparability. However this kind of comparability has nothing to do with whether the licence terms involve lump sums or ad valorem or DPU royalties. Thus it can be seen that the accountancy experts are not best placed to express a view about this kind of comparability. Comparability itself will be a matter for the judge to decide based on evaluation of all the evidence, which may well include fact evidence about the situations of the various parties and so on. Unpacking does not alter that sort of comparability at all.
[91]. On the other hand reliability is concerned with the quality of the information derived from a given licence, perhaps involving unpacking in various respects. With this distinction in mind, unpacking is not concerned with making a licence more or less comparable in the sense I have described it, it is about improving the reliability of the comparison.
[92]. As an approach, the 'comparables approach' is the one described in Cimetidine. Therefore the fact either expert adopted a comparables approach on instructions is no criticism. It is an appropriate approach in law. As accountancy experts they might well need to be instructed as to which licences they should consider. They were unlikely to be able to comment on comparability of individual licences as I have defined it, but they could and did comment on the quality of the data which can be gleaned from the licences - in other words they commented on reliability and were entitled to do so. An example to which we had our attention drawn was paragraph 6.51 of Ms Gutteridge's report of 14 January 2022 in which she explained that given the uncertainty in the evidence about certain factors, one of which was past releases, she was unable to adjust for such a factor but could only observe its directional impact.
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[95] Before leaving this topic I will say a bit more about starting from the SEP holder's own licences. I maintain that this is the place to start but that is all it is. Factors like hold out and hold up may well render licences of the same portfolio less good as comparables. In this case there are also licences to the putative licensee (Apple). Such licences are capable of being useful comparables, again subject to hold up and hold out, but using them also involves a further dimension which is why, although they may well be useful in the end, they are not the best place to start. Their comparability (not reliability) also depends on the relationship between the patent portfolio being licensed and the SEP holder's portfolio. Not only does one need a view about stack shares, the issue of portfolio quality arises. It is not enough to render them comparable to say that the SEP holder's portfolio is average. The other licensed portfolios also have to examined.
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[114] Whether adjusted as Apple submits or not, the judge's approach is an example of exactly the technique which Lloyd LJ warned against in Cimetidine because it involves using less good comparables to modify a result from better ones. In my judgment it is flawed. I would therefore allow the appeal on ground 1 and reject respondent's notice ground 1."
As Mr Justice Meade had heard a lot of argument about para [95] of Lord Justice Arnold's judgment, he explained that there is a preference to use the SEP-holder's licences, but they may have problems, in which case reference to the licensee's comparables may be made, recognising that because they are to a different portfolio they pose an inherent challenge, within which one issue will be portfolio quality. He found para [174] of Mr Justice Birr's judgment in Unwired Planet useful:
"If a group of good comparables corroborate one another then no doubt that is a factor to take into account but equally if apparently good comparables, when properly understood, contain different rates that is also relevant too."
Top Down Methodology
Mr Justice Meade noted that Lord Justice Birss had explained the top down methodology and its limitations in Optis:
"[19] So far what I have described of the arguments represents an approach which has been called 'bottom-up' in other cases. The expression is used to contrast with another approach known as 'top-down'. The top-down approach starts from a figure representing the amount to be paid for licensing all the patents essential to the standard, known as the patent stack. That figure can be called the royalty stack. Then a figure is taken for the patent stack share representing the proportion of the stack of SEPs attributable to a given licensor. The amount due to that licensor is derived simply by assigning the relevant share of that royalty stack to that licensor. Estimating the stack share is not easy but can be done to some extent, and it is sensitive to errors especially for small stacks. However a much more serious difficulty with this approach is how to find the starting point for the royalty stack itself. In UPHC I looked at public statements made by various technology companies at [263] - [269] and identified the difficulties with that as an approach ([269]). I also observed that if one tries to identify a total royalty stack based on comparable licences, the top-down approach is not independent of a bottom-up approach and would still depend on factors such as unpacking ([270]).
[20]. However in UPHC I did use this kind of thinking as a cross-check. If one has a figure for a licensor's stack share and a figure for the royalty to be paid to that licensor, you can combine the two to derive the total for the royalty stack which is implied. I believe that approach can be useful provided it is kept in its place. To take an obvious example, if the implied total royalty stack was 50%, that would show the proposed royalty was plainly untenable (assuming one is content with the stack share). In UPHC I noted that the IP High Court in Japan had adopted 5% as an aggregate royalty stack ([472]) and on the facts in UPHC the aggregate royalty burden was 8.8%. In the USA in TCL v Ericsson (2018 US Dist LEXIS 234535 (Selna, J) the figures were 6%-10%. In the more recent InterDigital v Lenovo Mellor J at first instance found that the per unit royalty he had arrived at implied an aggregate royalty of 1% and rejected a top-down cross-check analysis as inconsistent with the result based on comparables. On appeal the Court of Appeal increased the royalty by about 30% (from $0.175 to $0.225). At [286] Arnold LJ referred to the top-down cross-check, in a passage the other judges (Nugee LJ and I) agreed with. The point being made was that a comparables analysis is a much more reliable basis for estimating FRAND than the top-down cross-check in that case. Nevertheless, as Arnold LJ also observed, the increased rate arrived at on appeal was less inconsistent with the top-down analysis."
Mr Justice Meade observed that Lord Justice Birss considered the top-down approach only as a cross-check and that was the way that ZTE had proposed to apply that methodology.
Analysis
The judge stated at para [557] of his judgment that his starting point was to consider whether ZTE's previous licence agreement with Samsung or its licence agreement with Apple were useful comparables. He decided that they were and that the agreement with Apple was the one to be preferred.
His lordship had to make a number of adjustments to account for various differences for non-FRAND factors. He found that the pressures that ZTE was under, which I mentioned above, had led to a lower overall lump sum being agreed with Apple:
i) ZTE effectively gave a reduction of 12.5% because it was concluding its first out-licence, which percentage was at the top end of the range identified for that kind of "discount" by Samsung's expert;
ii) In addition, ZTE achieved a somewhat depressed amount for its 5G portfolio, to be represented by another reduction of 5% in the lump sum.
The combined effect of these was that the lump sum paid should notionally be treated as 21% higher (100/(100 - (12.5 + 5)%, rounded to the nearest per cent).
i) ZTE effectively gave a reduction of 12.5% because it was concluding its first out-licence, which percentage was at the top end of the range identified for that kind of "discount" by Samsung's expert;
ii) In addition, ZTE achieved a somewhat depressed amount for its 5G portfolio, to be represented by another reduction of 5% in the lump sum.
The combined effect of these was that the lump sum paid should notionally be treated as 21% higher (100/(100 - (12.5 + 5)%, rounded to the nearest per cent).
Consequence of the Finding
Samsung has already agreed to accept Mr Justice Meade's finding. ZTE has not yet done so. As it has applied to the Chongqing Intermediate People's Court for a determination of the terms of a global FRAND cross-licence between the parties covering the entirety of their respective portfolios of cellular SEPs, it will no doubt wish to await the decision of that court.
Further Information
Mr Justice Meade's judgment contains a thorough review of the authorities on FRAND and comparables. Anyone wishing to discuss this case note or FRAND generally may call me on +44 (0)20 7404 5252 during UK office hours or send me a message through my contact form.
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