SEP/FRAND Hub 2023/2024 – Global Competition Review

On November 28, 2023, the Chongqing Municipal First Intermediate People’s Court handed down the first instance judgment on the SEP royalty dispute between Oppo and Nokia (2021 Yu01 Minzhong No. 1232). This is the first time a Chinese court has ruled on SEP’s global license fee rates.

Judgment details

According to the published decision, in countries and regions with per capita GDP of USD 20,000 or above, Oppo will license Nokia for USD 1.151 per 5G multimode mobile phone and USD 0.777 for each 4G multimode mobile phone. You need to pay a fee. In other countries and regions, including mainland China, Oppo must pay a 61.42% discount on this license fee, which is USD 0.707 per 5G multi-mode mobile phone and USD 0.477 per 4G multi-mode mobile phone. corresponds to

These license fees are calculated based on the license fee rate of the 5G multi-mode mobile phone and the net selling price during the license period. The former is calculated based on:

• 5G single mode license fee.
• 4G multimode license rate.and
• Value contribution of 5G technology and 4G multimode technology.

5G single mode license fee

The 5G single-mode license rate is the product of the 5G standard total royalty rate and Nokia’s 5G patent portfolio strength ratio. In this case, the former was determined to be between 4.341% and 5.273%, making it the first time in the world that the total royalty rate for a 5G standard has been determined. Oppo hired an economics professor who proposed a distinctive pricing model, which was subsequently accepted by the court. The court used the following specific formula to calculate the total royalty rate based on the added value that 5G standard technology contributes to his mobile phone compared to 4G.

The total royalty rate for the 4G standard was determined to be between 6% and 8% based on industry knowledge and past judicial decisions. The 5G factor refers to the percentage a consumer is willing to pay for her 5G phone over her 4G phone, and in this case includes projections for the next 3 to 5 years. This forecast is based on his 11 5G factors from the time of 5G phone launch to the last quarter of 2021 and uses an exponential model. The court considered this methodology to be more appropriate, rigorous and reasonable. The ratio of average selling prices of 4G and 5G mobile phones has also been predicted for the next 3-5 years using an exponential model.

Regarding the strength of Nokia’s 5G patent portfolio, the calculation of the 2G to 5G patent strength ratio is based on the ratio of Nokia’s patent declarations to all SEP declarations. Specific percentages of Nokia’s 2G-5G patent portfolio strength have been compiled from published decisions. Data sources are statistical data from third parties such as:

• Report from Concur IP (related data also redacted).
• According to a report by Beijing MQPat Technology, as of July 31, 2021, the number of 4G SEPs declared by Nokia to ETSI accounted for 7% of the total 4G SEPs, and the share of Nokia’s 5G SEPs was also 7% ( “2021 Global 4G/ 5G Standard Essential Patents Detailed Analysis Report”, January 2022);
• IPlytics reports that as of September 30, 2021, Nokia’s declared 5G patent families to ETSI (including granted patents and pending applications) accounted for 8.34% of all declared 5G patent families. (See “Who’s leading the 5G patent race?”);
• According to a report by the China Academy of Information and Communication Technology, 5G patents declared by each ETSI member country will be used for statistical analysis, and the declaration period will be limited to January 1, 2017 to December 31, 2021. Nokia’s actual global share is 7.6% of the patent family (Global 5G Patent Activity Report, 2022).
• According to a report by Clarivate Analytics, according to SEPs declared to ETSI from March 1, 2016 to December 31, 2021, the number of patent families declared by Nokia is 2,994, with a total number of 46,322. Nokia’s 5G patents account for approximately 6.46% (“Demystifying the essential patent landscape of 5G standards with manual SEP: Phase 3”).

Nokia’s patent declaration count includes patents granted as well as those pending. The court held that the patent license scope defined by the parties in the license negotiations (for example, the list of patents that Nokia provided to his Oppo) actually included all pending applications declared by Nokia and granted patents. It was deemed that the patent was included. Additionally, the court held that many declared 5G patents may be pending at the time the license agreement is entered into and then be granted during the term of the agreement. Therefore, determining the strength of Nokia’s patent portfolio based on the proportion of patent declarations that also incorporate pending applications is more reasonable and consistent with the parties’ actual negotiations.

Nokia proposed that the court’s decision on the portfolio strength ratio should also consider the number of approved proposals and the actual essentiality of the patent. In contrast, the court held that in the case of large samples, all SEPs can be considered to be of the same quality and that it is possible to use the number of declarations to assess the strength of a patent portfolio.

However, the court will consider that if there is sufficient evidence to prove that the quality of Nokia’s declared SEPs is significantly higher or lower than the industry average quality, or if there are important underlying patents that need to be evaluated on a case-by-case basis. He also pointed out that adjustments may be made if the situation arises. .

Furthermore, with respect to Nokia’s patent invalidation proceedings, the court held that the strength of Nokia’s patent portfolio cannot be assessed on the basis of relevant existing evidence.

Value contribution rate of 5G technology and 4G multimode technology

In this case, the value contribution ratio of 5G, 4G, 3G, and 2G technologies was found to be 50:40:5:5. This means that 5G technology contributes to 50% of the technology value of the mobile phone industry.

In this judgment, following the precedent set by the Nanjing Intermediate People’s Court, the court recognized for the first time that the value contribution ratio of 4G, 3G, and 2G technologies is 8:1:1. Huawei vs Conversant. Regarding the value contribution of 5G technology, the court found that, based on the evidence submitted by the parties regarding the development status of 4G and 5G technology, 5G technology has further expanded the field of industrial application of communication technology, but focused only on the smartphone industry. In this case, the existing evidence does not sufficiently demonstrate that the contribution of 5G is significantly larger than that of 4G at this stage. Furthermore, the value contribution of 5G technology compared to 4G should not be overestimated, as the license period involved in the dispute is in the early stages of 5G implementation in the smartphone sector. Therefore, the court accepted the plaintiff’s argument that 5G technology currently accounts for half of the value contribution and determined the value contribution ratio of 5G, 4G, 3G, and 2G technologies to be 50:40:5:5.

Parties respond to judgment

After the judgment was handed down, Oppo announced its intention to comply with and enforce the court’s decision regarding worldwide FRAND license fees for Nokia’s patents. However, Nokia said the impact of the ruling was limited to China and therefore only presented one perspective. Nokia will reportedly appeal this decision to China’s Supreme People’s Court.

Important points

Some Chinese mobile phone manufacturers have gradually transitioned from their previous role as implementers to the role of both implementer and rights holder, and many Western traditional manufacturers have It is gradually reducing the scale of mobile phone production and sales, turning to patent licensing as one of its sources of information. With increasing profits, the 5G patent licensing industry has undergone a transformation. This decision is one that Chinese courts are actively considering when determining SEP license fees.