Courts That "FRAND" Differently Part 3

My two previous posts in this series examined the tidbits that can be gleaned from the UK and Chinese cases in the ZTE/Samsung dispute, Courts That "FRAND" Differently: Part 1, and the first set of lessons that can and should be learned from them with a focus on structural problems (lessons 1-4), Courts that “FRAND” Differently Part 2: Lessons To Be Learned. This post also focuses on lessons that can and should be learned from the cases with a focus on FRAND licenses and “comparability” (lessons five and six).

Lesson Five – There are a Lot of Non-FRAND Licenses Out There

The fifth lesson is this:  everyone, including the parties and each of the UK Court and the Chinese Court, found that SEP portfolio license rates are “seriously affected” when there is a sales ban, or the threat of a sales ban (e.g., an injunction or exclusion order), even if the ban occurs only in a single country.   ZTE argued that its bargaining power, and thus the license amount in the original 2021 License between ZTE and Samsung, was “seriously affected” by US sanctions, which prevented ZTE from selling its products in the United States.  Samsung argued that its high dollar licenses with Ericsson, Nokia and Interdigital (“ENI Licenses”) were similarly affected by Ericsson, Nokia and Interdigital’ s litigious nature and willingness to seek injunctions.

The UK Court agreed with both parties on these issues.  It found that the “extraneous pressure” of a sales ban, whether through sanctions or through injunction threats, meant that the 2021 License, and Samsung’s Ericsson, Nokia and Interdigital licenses, were “severely” affected by non-FRAND factors.     

Similarly, in the Chinese case, Samsung argued that during “the negotiation of the Samsung Electronics-Ericsson Agreement and the Samsung Electronics-Nokia Agreement, Samsung Electronics faced substantial litigation pressure and injunction threats. These agreements do not represent 'voluntary consensus reached without psychological coercion,’ and the stipulated licensing fees are likely to exceed the FRAND (Fair, Reasonable, and Non-Discriminatory) range.”  China Decision at 36.

The Chinese Court viewed some of the individual licenses a bit differently than did the UK Court.  However, the Chinese Court agreed that at least some of the licenses were “not comparable” in part because of these issues. 

In such cases, when parties present corresponding agreements and claim they constitute comparable agreements, such claims are highly likely to reflect self-serving considerations. Therefore, for agreements that formally meet the aforementioned criteria but whose actual content deviates significantly from common sense upon close examination, courts must exercise caution in determining their comparability.  China Decision at 88.

And interestingly, both courts found certain licenses – Ericsson’s in particular– essentially to be non-FRAND in large part because the Ericsson license emerged from a global litigation war and threats of injunctions or exclusion orders.  U.K. Decision at para. 347; China Decision at 93.  Interestingly, the UK Court also found that the threat of divestment to a non-practising entity amounts to an “indirect litigation risk.”  UK Decision at para. 130.

The take-away from lesson five should be that there are a lot of non-FRAND licenses out there.  This is a really important lesson to learn since some courts – such as the German courts and the UPC – accept at face value the rates in any license a SEP holder deigns to share with the court. 

These findings also call into doubt the FRAND-ness of any license entered into after an injunction (or other type of sales ban) has been sought or obtained.  I love the Chinese Court’s use of the term “common sense.”  So often, the valuation arguments that are made in court defy common sense but are accepted anyway, at least in some courts.

In that regard, lesson five also casts doubt on the German courts’ insistence that injunctions are good because they encourage licenses.  If the result of that “encouragement” is a non-FRAND license, then the German courts’ stated purpose in issuing injunctions leads to wrongful outcomes in disputes involving FRAND committed SEPs.  But, this is a lesson that the German courts and the UPC refuse to accept or even acknowledge – injunctions often lead to non-FRAND results and thus should be highly disfavored, and rarely if ever used, in FRAND licensing disputes.

Lesson Six:  Comparable Is as Comparable Does

That brings me to lesson six: even with respect to the licenses that each Court found to be “comparable,” each of the Courts made a lot of “adjustments” to the rates and terms found in those “comparable” licenses.  The UK Court termed these adjustments “unpacking” and “repacking” and admitted that these adjustments were often “subjective.” UK Decision at para. 27 and 41. 

For example, in these cases, each of the Courts had to decide how to address the fact that some of the licenses were cross-licenses and others were one-way licenses.  The Courts also had to address how to deal with licenses that did not cover all of the generations of the same standard.  For example, the Chinese Court decided that the 2021 License between ZTE and Samsung did not cover 5G (whereas the UK Court decided that it did).  So, in order to determine how much to allocate to 5G, the Chinese Court had to use a totally different agreement as the basis for the 5G rate.  Chinese Decision at 91-92.  The Courts also had to figure out how much to allocate to each version of the standard since many of the agreements apparently had set amounts for the entirety of 2G/3G/4G/LTE.[1]  The Courts also had to address the fact that the scope, extent and quality of the portfolio licensed in each of the “comparable” licenses were different. 

Lesson six calls into doubt the very idea that examining “comparable” licenses leads to an objectively fair, reasonable and non-discriminatory license.  The fact that the Courts first needed to determine which licenses were "comparable" and then that there were so many different variables that the Courts needed to unpack and repack from the "comparable" licenses meant that what resulted was, as the UK Court admitted, a subjective outcome.  This subjectivity resulted in the Courts making dramatically different decisions about what constituted a "FRAND" amount.

Conclusion

Lessons five and six show that by using the “comparable” license methodology we are baking in the problems of the past because there are so many non-FRAND licenses out there.  Lessons five and six also show that the comparable license methodology can lead to very different results depending on how different courts subjectively view which licenses are "comparable" and how those different courts “pack” and “unpack” each of those “comparable” agreements.

[1] The Courts do not seem to have recognized that most of the 2G/3G patents have expired or will be expiring soon. Nor do they seem to have recognized that 2G/3G systems have been retired and are never, or almost never used anymore, at least in locations in which the subject portfolios have a lot of SEPs.