The Chongqing Nokia v OPPO global FRAND rate determination
Although Nokia and OPPO have now settled their multi-jurisdictional SEP dispute, the decision of a Chinese court while it was still active created a new milestone in the development of the country’s patent licensing landscape. Sisvel’s Donald Chan analyses the outcome.
In a landmark decision, the Chongqing No.1 Intermediate People’s Court (the Chongqing Court) set the global FRAND rates for Nokia's cellular SEP portfolios last December. This was in relation to a dispute between the Finnish company and OPPO which spawned cases in jurisdictions across the world, but which was settled towards the end of January.
Despite the settlement and the ending of Nokia’s appeal against the judgment that is a consequence of it, the Chongqing decision is worthy of analysis. It was the first time a Chinese court has made such a FRAND determination, and only the fourth time that it had happened anywhere.
Basic principles of determining the FRAND rates
According to the “Interpretation (II) of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Patent Infringement Dispute Cases”, the parties in a patent dispute do not need to show their willingness to license before asking a People’s Court to determine the licensing conditions. They only need to prove that they failed to reach an agreement after thorough negotiations.
In this case, the Chongqing Court found that:
Nokia had first sued OPPO for patent infringement in multiple jurisdictions after years of negotiation;
that OPPO subsequently counter-sued Nokia; and
that the Chongqing Court had mediated several times between the parties during the trial, but without success.
These facts indicated that the negotiation was unsuccessful and that, therefore, OPPO had the right to ask the court to determine a FRAND rate for Nokia’s cellular portfolio.
OPPO's position on regional discounts was largely accepted. The court found that Nokia's cellular portfolio is not evenly distributed globally and that OPPO's key markets are in developed countries and Mainland China, which are also the main regions covered by Nokia's portfolio. Therefore, the court divided the world into three:
(1) Regions with per capita GDP above USD 20,000,
(2) Mainland China, and
(3) the rest of the world.
Based on OPPO's evidence and global case law, the court decided that Region 1 should use a base rate without discount and Regions 2 and 3 should use a 61.42% discount.
The court also recognised that the "top-down approach" and "comparables analysis" have their advantages and disadvantages. It did not favour one method over the other, instead using both to determine a FRAND rate.
Position on “comparables analysis”
The court applied several factors to determine the comparability of a licence agreement. These included the characteristics of the parties, the relevance of the licensed patents to the products, and the actual intentions of the parties. Furthermore, it argued that sales channels and business models should not affect the comparability assessment of a licence agreement.
The court also emphasised the importance of considering the negotiation context when analysing a comparable. For instance, it ruled that no discounting should be used in the analysis if the parties' negotiation history does not indicate that the instalment plan was a crucial factor that influenced the total licence value. Similarly, if a licence agreement does not mention any discounts, they still need to be taken into account in the analysis if the negotiation history clearly shows that discounts had been negotiated.
Position on “top-down analysis”
"Top-down analysis" calculates a FRAND rate for a certain technology based on the total royalty for all SEPs related to that technology. This is called the aggregate royalty rate (ARR).
The court considered various sources, such as cases elsewhere and the statements of major cellular SEP holders like Nokia and Ericsson, to determine the following global ARR: 5% for 2G, 5% for 3G, and 6%-8% for 4G.
Before this dispute, there was no industry consensus or judicial determination of 5G ARR. In this case, the court basically adopted OPPO's proposed determination method, which is based on two factors:
how much more a consumer would pay for a 5G phone than a 4G phone; and
the ratio of the average selling price of 4G and 5G phones.
Applying this method, the court determined the global 5G ARR should be between 4.341% and 5.273% in the next three to five years.
The judgment not only represented the first judicial determination of 5G ARR, but it also decided how much each generation of technology (2G to 5G) contributes to a 5G phone. The court was of the view that 5G technology does not add much value to a smartphone compared to 4G technology, and decided a fair technical contribution ratio (5G:4G:3G:2G) in a 5G phone should be 50:40:5:5.
In determining Nokia’s reasonable share under the ARR, the court relied solely on the number of declared essential patents, including both granted patents and applications. It rejected the relevance of factors such as attendance in standardisation meetings and number of (accepted) technical contributions because they did not show that Nokia's cellular portfolio quality was significantly different from the average in the industry.
The court’s findings
Based on the unpacking of the 2018 licence agreement between Nokia and OPPO, together with a determination of the change in Nokia’s 4G portfolio strength between 2018 and 2021, the court concluded Nokia’s reasonable 4G rates to be:
Region 1: $0.777/unit
Region 2 and 3: $0.477/unit
Regarding the determination of 5G rates for Nokia’s portfolio, the court applied both “comparable analysis” and “top-down analysis” and concluded the following rates to be reasonable:
Region 1: $1.151/unit
Region 2 and 3: $0.707/unit
Close eye on China
As described above, the court favoured OPPO on most issues. However, using the rates it set and applying them to the estimated sales of OPPO, Oneplus, and Realme for 2023, OPPO would owe Nokia around $100 million for last year alone. This is not a trivial amount and may actually exceed the expectations of some observers of the Chinese court system.
However, there could be hidden factors, that are not revealed in the heavily redacted judgment that is available to the public, which prevent us from fully grasping the implications of this decision for the patent licensing landscape in China and beyond. This view was also shared by the Delhi High Court and the European Union. Both requested access to the unredacted text. Whether that will be forthcoming given the settlement is an open question.
The world is paying close attention to recent Chinese SEP litigation developments. In December2023, the Supreme People's Court also issued its first FRAND rate determination decision in a dispute between Advanced Codec Technologies and OPPO (and a similar one involving Vivo as the defendant). This went in favour of the plaintiff and relied only on “comparable licences” in determining a China rate for the six accused Chinese patents.
It will be worth monitoring how other courts in China follow this judgment, as well as the one that was handed down in Chongqing.
Donald Chan is 5G Multimode Licensing Programme Manager at Sisvel.