Samsung Electronics Co, Ltd v ZTE Corporation

In determining FRAND terms for a global SEP cross-licence, the court should begin with the most comparable licence available. A licence to the same portfolio is generally preferable, but substantial non-FRAND factors may require objective or evaluative adjustments. Comparable licences affected by materially different portfolios, injunction risk or bargaining circumstances may be rejected where the adjustments cannot be made reliably.

A top-down analysis is ordinarily a cross-check rather than a substitute for reliable comparables. The court may use a DPU methodology for handset sales where an uncapped ad valorem approach would distort the comparison. FRAND terms may include a range of permissible outcomes, but the patentee’s choice is not an automatic answer to every methodological uncertainty.

Samsung and ZTE sought determination of the terms of a global FRAND portfolio cross-licence renewing their 2021 agreement. The parties agreed that Samsung would be the net payer and that the principal dispute concerned the lump-sum royalty, with additional disputes concerning non-royalty terms.

Samsung relied principally on the 2021 PLA and ZTE-Apple 2020 as comparables. ZTE relied on Samsung’s licences with Ericsson, Nokia and InterDigital, together with a top-down cross-check. The court also considered further ZTE and Samsung licences, the scope of the 2021 PLA, past sales, 4G and 5G weighting, portfolio comparisons and the proposed terms of the Court-Determined Licence.

1. Choice of comparable. The court held that the Big Two were potentially useful comparables, but preferred ZTE-Apple 2020 to the 2021 PLA. ZTE-Apple 2020 was a licence to the same portfolio, clearly covered 5G and was less affected by non-FRAND factors. The VOX licences could not reliably be unpacked. The ENI licences were rejected because of major portfolio differences and the likely effect of injunction risk and the counterparties’ exceptional licensing strength. The Samsung in-licences, viewed overall, were too variable and uncertain to provide a reliable FRAND range.
2. Non-FRAND factors. ZTE’s sanctions-related financial pressure, need for rapid cash, lack of outbound licensing experience, limited litigation options and difficulty obtaining value for 5G had depressed the Big Two rates. The court adjusted the ZTE-Apple 2020 payment by 12.5% for a first-licence discount and 5% for depressed 5G value. It treated past sales as subject to an 80% discount, in addition to assumed limitation periods.
3. Construction of the 2021 PLA. The licence covered patents re-declared essential to 5G, although it excluded 5G-only functionality. The covenant not to sue for 2024 operated as a release: no damages accrued for sales during that period. The clause requiring the parties to consider the value of the release preserved their positions on renewal but did not defer payment.
4. Unpacking and repacking. The court adopted a DPU approach for handset sales and rejected an uncapped ad valorem methodology. Future sales were assessed using Counterpoint forecasts. The court adopted 80:10:10 multimode weighting for 4G and 50:40:5:5 for 5G, rejected an additional 5G premium, excluded expired patents from the denominator of portfolio strength ratios, included application-only families where the effect was not materially distortive, and applied a 50% emerging-market adjustment.
5. Top-down cross-check. Although recognised as potentially useful, the top-down method was too sensitive to stack-share assumptions and caps in this case. It did not justify preferring the ENI licences over ZTE-Apple 2020.
6. Non-royalty terms. The terms sought by Samsung covering additional patents and products were one FRAND structure. ZTE’s unexplained withdrawal from terms previously accepted in renewal negotiations, coupled with its failure to propose a workable alternative, was not FRAND conduct.
7. Disposition. The FRAND balancing payment under the Court-Determined Licence was fixed at $392m. The court adopted Samsung’s proposed disputed non-royalty terms and directed that the form of order, confidentiality and redaction issues be addressed subsequently.