Much ado about patent licensing? Implications for the US in the ZTE/Samsung UK SEP ruling

This article first appeared in Reuters Legal News and Westlaw Today: Much ado about patent licensing? Implications for the US in the ZTE/Samsung UK SEP ruling

There is no global patent court. But as global entities seek to make sure that the products they sell comply with global standards, foreign courts increasingly feel empowered to set a licensing rate not just within a country, but a global rate. And that global rate may affect a consumer’s ability to connect to a telecommunications network.

These global licensing rates are called “FRAND,” which stand for “fair, reasonable, and non-discriminatory.” FRAND was at the center of litigation between Samsung and ZTE in the UK Patent Court. In that litigation Samsung sought a (low) FRAND rate to license ZTE’s 5th generation (“5G”) standard essential patents (“SEPs”).

Broadly, Samsung argued the FRAND rate should be based on two ZTE licenses it had entered into several years ago, one with Samsung and one with Apple. ZTE relied on three different 5G SEP licenses that Samsung entered into with Ericsson, Nokia, and Interdigital. Samsung “won” this particular case in that the FRAND rate the UK court set led to a lower balancing payment to ZTE than ZTE sought. It was not the first decision that set a FRAND rate, but the pace of such decisions is increasing.

Since that UK decision, at least five other parallel litigations were proceeding between the same entities in different jurisdictions: the United States, China, Brazil, Germany, and the EU’s Unified Patent Court (“UPC”). Those actions generally concern the same entities and implicate the same telecommunications standards.

Indeed, shortly after the UK decision, several courts (the UPC, a German court, and a Chinese court) handed down their own rulings, each setting a different worldwide FRAND rate that leads to a lump-sum monetary balancing payment (from Samsung to ZTE). Ultimately, the two parties are fighting over whether the size of that payment favors ZTE or Samsung.

This article is not about the economics as to the pro- and anti-competitive features of standards and SEPs. Indeed, there are many articles and court decisions that concern striking the right balance between SEP-holders and implementers. This article is about why this multi-national fight between two multi-national entities does matter.

If foreign courts continue to try to resolve these standards dispute by setting a global FRAND rate, then entities will have several “FRAND” rates and ultimately it will impact the cost we pay for telecommunications and/or the interoperability of our handheld device with the global telecommunications network.

What does FRAND mean?

A standard is a tool that allows end-users the ability to use different devices to connect to a larger network. Importantly, a standard does not necessarily enshrine the technologically “best” way to connect to a network; it is a collective choice that ensures interoperability between handheld devices and the telecommunications network.

As companies seek to implement a given standard, they often negotiate for a FRAND rate to license SEPs held by SEP-holders.

The “ND” part of FRAND is relatively straightforward. Generally, a SEP-holder (like ZTE) must offer a license and enter into that license to any party that desires a license. And an implementer (like Samsung) must take a license to those SEPs if it wishes to make products that comply with the applicable standard.

The “FR” part of FRAND concerns whether an offer is “fair” or “reasonable.” “Fair” or “reasonable” to whom? And then who decides whether an offer is fair? Who can decide? Where does it apply? And most importantly for this article, why should anyone care? For example, the ZTE/Samsung UK decision did not presume to hand down a FRAND rate for any SEP that purports to read on the 5G standard, but rather it considered the offered terms of a global, FRAND portfolio cross-license between Samsung and ZTE.

Litigation throughout the world has arisen to resolve disputes associated with SEPs. But that dispute can end up sounding like this: You are a member of a Standard Setting Organization (“SSO”). You, the SEP-holder, agreed to license your SEPs at a FRAND rate. The licensing offer you made to me — the implementer — was not at a FRAND rate. Thus, you breached your contractual obligations to the SSO and me, the implemeter. The SEP-holder denies this and often counter-claims that it made an offer at a FRAND rate, and, thus, is not in breach of any obligation to the SSO or to the implementer.

Often a court chooses to “resolve” a dispute like this by setting a worldwide FRAND rate (which may not correspond to either party’s FRAND rate). But the outcome of each individual dispute is not dispositive of a FRAND rate for all 5G SEPs, just the specific SEPs at issue in the litigation between the SEP-holder and the implementer.

Moreover, these disputes often get resolved through private negotiation between the parties. The parties employ lots of people to make that business decision happen. And the decision comes down to a threat of consumer products being excluded from a particular market versus what an entity is asked to pay for a license. Key to that calculus is knowing that a court might exclude an implementer from a market, i.e., an injunction. Without that threat, there may be little incentive to license SEPs.

What happened in the UK?

The UK ZTE/Samsung decision referenced three UK FRAND rulings, all of which involved telecommunications standards set forth by SSOs. They are Unwired Planet/Huawei (2017), Interdigital/Lenovo (2023), and Optis/Apple (2023). In addition to the ZTE/Samsung UK dispute, other recent rulings all purported to resolve whether a SEP license offer complied with the FRAND obligations attached to a telecommunications standard.

Ultimately, the UK Court’s reasoning hinged on which past licenses it felt were most comparable to the instant dispute, reasoning that largely favored Samsung’s position, though taking into account some non-FRAND factors (e.g., the backdrop of international sanctions against ZTE when it entered into past licenses) that had an upward rate adjustment on the ultimate worldwide rate set by the UK Court.

Why does that UK decision matter to the parties involved?

In a strict legal sense, the ZTE/Samsung decision in the UK does not matter outside the UK. They are essentially patent disputes, and patents are creatures of national law. In general, though, the parties may have headquarters outside the US, and federal district courts may only adjudicate claims arising from US patents. The same is generally true in other jurisdictions.

Different courts in different jurisdictions have already established differing worldwide rates. At least four different adjudicatory bodies set worldwide FRAND rates that have resulted in four different balancing payments from Samsung to ZTE for the use of its SEPs.

But unless the entities agree in advance to abide by whatever rate is set by a specific court, ZTE or Samsung can wait to see which court’s worldwide FRAND rate favors one party or the other. Indeed, the UK decision denotes ZTE’s non-acceptance: “ZTE has not challenged this Court’s jurisdiction in these proceedings, but neither has it given an undertaking to enter into the [court-determined license].” (Samsung v. ZTE, [2026] EWHC 999 (Pat), Case No: HP-2024-000044, Para. 53.)

In order to move beyond jurisdiction-specific patent litigation, private parties may prefer to engage in a binding dispute resolution procedure (such as international arbitration) to determine a worldwide FRAND rate. A private proceeding would have the twin benefits of increasing cost certainty and resolving disputes across multiple jurisdictions. Further, any FRAND rate set as between the parties would remain confidential and would not skew the value of FRAND rates set between different entities involving different SEPs.

Implications of the ZTE/Samsung FRAND fight

Currently, the legal regime in the US disfavors injunctive relief in many patent disputes. But the impact of a FRAND decision outside the US still impacts the US because, at the very least, prices paid by consumers for handheld devices reflect court decisions that purport to set a worldwide FRAND rate. Until US Courts issue injunctive relief for SEPs, FRAND rates will be set by courts outside the US.

To the extent courts outside the US are ready and willing to set global FRAND rates, SEP litigation will occur in those fora and not in the US. With respect to multi-national entities that compete in multiple jurisdictions, litigation in multiple jurisdictions will take a backseat to procedures that bind both parties.