Unpicking the implications of Oppo v Nokia and what it means for global licence rates
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Oppo v Nokia
First Intermediate People's Court of Chongqing Municipality
|Cause of action
|SEP royalty dispute
On 28 November 2023, the First Intermediate People’s Court of Chongqing Municipality handed down a first-instance judgment on the SEP royalty dispute between Oppo and Nokia (2021 Yu 01 Minchu no 1232). This is the first time that a Chinese court has issued a decision on global licence rates for SEPs.
According to the published decision, in countries and regions with per capita GDP greater than or equal to US$20,000, Oppo should pay Nokia a licensing fee of US$1.151 per 5G multi-mode mobile phone and US$0.777 per 4G multi-mode mobile phone. In other countries and regions, including Mainland China, Oppo should pay this licensing fee with a 61.42% discount, which amounts to US$0.707 per 5G multi-mode mobile phone and US$0.477 per 4G multi-mode mobile phone.
These licensing fees are calculated based on the licence rate of 5G multi-mode mobile phones and their net selling price during the licence period. The former is calculated based on:
- the 5G single-mode licence rate;
- the 4G multi-mode licence rate; and
- the value contribution ratio of 5G technology and 4G multi-mode technology.
The 5G single-mode licence rate
The 5G single-mode licence rate is the product of the aggregate royalty rate of the 5G standard and the portfolio strength ratio of Nokia's 5G patents. In this case, the former was determined to be between 4.341% and ~5.273%, marking the world’s first determination of an aggregate royalty rate for the 5G standard. Oppo hired an economics professor, who proposed a characteristic price model that the court subsequently accepted. The court calculated the aggregate royalty rate based on the added value that 5G-standard technology contributes to mobile phones compared to 4G, using the specific formula below:
Aggregate royalty rate of 5G standard = (aggregate royalty rate of 4G standard + 5G coefficient) × ratio of average sales price of 4G and 5G mobile phones
The aggregate royalty rate of the 4G standard was determined to be between 6% to 8% based on industry knowledge and previous judicial decisions. The 5G coefficient refers to the percentage more that consumers would be willing to pay for a 5G mobile phone than for a 4G one, and in this case, includes a prediction for the next three to five years. This prediction is based on the 11 5G coefficients from the time that 5G phones were launched to the last quarter of 2021 through an exponential function model. The court considered that this methodology fits better and is rigorous and reasonable. The ratio of the average sales prices of 4G and 5G mobile phones has also been forecast for the next three to five years using an exponential function model.
With regard to Nokia’s 5G patent portfolio strength, the calculation of the strength ratios of its 2G-5G patents is based on the ratios of the number of Nokia’s patent declarations and all SEP declarations. The specific ratios of the portfolio strength of Nokia’s 2G-5G patents have been redacted from the released decision. The data source is statistical data from third parties, including:
- a report from Concur IP (the relevant data was also redacted);
- a report from Beijing MQPat Technology, which showed that as of 31 July 2021 the number of 4G SEPs declared by Nokia to ETSI accounted for 7% of all 4G SEPs and the share of Nokia's 5G SEPs was also 7% ("2021 Global 4G/5G Standard Essential Patent In-depth Analysis Report”, January 2022);
- an IPlytics report, which highlighted that as of 30 September 2021 the 5G patent families that Nokia declared to ETSI (including granted patents and pending applications) accounted for 8.34% of all declared 5G patent families (see "Who Is Leading the 5G Patent Race?");
- a report from the China Academy of Information and Communication Technology, which revealed that by using the 5G patents declared by each member in ETSI as the statistical analysis object and limiting the declaration time from 1 January 2017 to 31 December 2021, Nokia’s share of effective global patent families is 7.6% ("Global 5G Patent Activity Report”, 2022); and
- a report from Clarivate Analytics, which showed that according to the SEPs declared to ETSI between 1 March 2016 to 31 December 2021, the number of patent families declared by Nokia stands at 2,994 and the total number at 46,322, so the ratio of Nokia’s 5G patents accounts for approximately 6.46% ("Demystifying the 5G standard essential patent landscape with manual SEP: Phase 3").
The counting of Nokia's patent declarations includes not only granted patents, but also pending applications. The court considered that the patent licensing scope defined by the two parties in the licensing negotiations (eg, the patent list that Nokia provided to Oppo) actually had included all pending applications and granted patents declared by Nokia. Additionally, the court held that many of the declared 5G patents may be pending at the stage of signing the licence agreement, which would then be granted during the agreement period. Therefore, determining the portfolio strength of Nokia's patents based on the ratio of its patent declarations that also incorporate pending applications conforms to the two parties’ actual negotiations and is more reasonable.
Nokia has proposed that the court’s determination on the portfolio strength ratio should also consider the number of approved proposals and the actual essentiality of the patents. In response, the court held that in the case of massive samples, all SEPs can be regarded as having the same quality, making it feasible to use the number of declarations to evaluate the strength of a patent portfolio.
However, the court also noted that if there is sufficient evidence to prove that the quality of Nokia’s declared SEPs is significantly higher or lower than the average quality in the industry or there are important fundamental patents that need to be evaluated separately, adjustments may be made.
Further, with regard to the invalidation proceedings of Nokia's patents, the court held that the portfolio strength of Nokia's patents could not be evaluated based on the relevant existing evidence.
Value contribution ratio of 5G technology and 4G multi-mode technology
It was determined in this case that the value contribution ratio of 5G, 4G, 3G and 2G technologies is 50:40:5:5, which means that 5G technology contributes 50% of the technical value of the mobile phone industry.
In this decision, the court first recognised the value contribution ratio of 4G, 3G and 2G technologies to be 8:1:1, according to the precedent that the Intermediate People’s Court of Nanjing set in Huawei v Conversant. With regard to the value contribution ratio of 5G technology, the court considered that – based on the evidence provided by the parties concerning the current status of development of 4G and 5G technologies – although 5G technology has further expanded the industrial application fields of communication technologies, when only focusing on the smartphone industry, the existing evidences does not sufficiently demonstrate that the contribution of 5G at its current stage is significantly greater than that of 4G. Moreover, the licence period involved in the dispute is at the early stage of 5G’s introduction into the smartphone field, so the value contribution of 5G technology compared to 4G should not be overestimated. Therefore, the court took the plaintiff’s assertion that 5G technology currently accounts for half of the value contribution and determined the 50:40:5:5 value contribution ratio of 5G, 4G, 3G, and 2G technologies.
The parties respond to the judgment
After the judgment was made, Oppo expressed its willingness to comply with and execute the court's decision concerning the global FRAND licensing fees for Nokia's patents. However, Nokia stated that the judgment's impact is limited to China only and, as such, only represents one perspective. It is reported that Nokia will appeal the decision to China’s Supreme People’s Court.
As several Chinese mobile phone manufacturers have gradually transitioned from their previous role as implementers to becoming both implementers and rights holders and many Western traditional manufacturers have gradually reduced their production and sales scale of mobile phones while turning to patent licensing as one of their primary sources of profit, the 5G patent licensing industry has transformed. This judgment is an active exploration by the Chinese courts in determining SEP licensing fees.