On November 28, 2023, the Chongqing First Intermediate People’s Court (“Court”) made a trial judgment in the dispute between OPPO and Nokia over the Standard Essential Patent royalty rate for 5G and 4G handheld devices (See Table 1). This judgment marked the first decision by a Chinese court regarding the global royalty rate of SEP licensing. The Court also fixed the global industrial cumulative rate for the 5G standard at 4.341%-5.273% and the intergenerational value ratio from 5G to 2G for 5G multimode mobile phone at 5G:4G:3G:2G = 50:40:5:5. The calculation and methodology used to decide the rate and royalty fee formed the nucleus of the judgment.

  Nokia and OPPO entered into a licensing agreement in 2018 (“2018OPPO agreement”) with a license covering 4G to 2G SEPs. Three years later, they failed to renew the deal, leading Nokia to file lawsuits for infringement on SEPs and non-SEPs in more than ten countries or regions worldwide.[1] In return, OPPO sued Nokia in China for an adjudication on new licensing terms. Nokia had moved to challenge the competence of geographical jurisdiction of the Chinese court. But the Court dismissed the motion and continued on with the substantive issues of the case.

  Regarding the fundamental elements of the licensing terms, the Court decided that the duration of the license should be three years to cover the OPPO, Realme and Oneplus smartphone brands. Both the 2018OPPO agreement and an agreement between Xiaomi and Nokia (“Xiaomi agreement”) were accepted as the comparable references. Furthermore, the Court took the net selling price (nsp) of a mobile phone as the unit pricing basis (to time the royalty rate to generate the royalty fee) rather than the average selling price (asp) since the latter, being a higher figure, would unreasonably include the costs of packaging, insurance and shipping, among other things. With these elements set, the Court proceeded to analyze the royalty fees for 4G and 5G multimode mobile phones. They are set forth as the following.

  4G multimode mobile phone

  In order to determine the 4G royalty, the Court primarily looked into the 2018OPPO agreement. The Court extracted Nokia’s unilateral license royalty fee and the expectable sales volume from the 2018OPPO agreement taking into account the negotiation status and regular business norms at that time. The Court further evaluated the change in Nokia’s 4G market strength between the times of the 2018OPPO and the 2021OPPO agreements so an adjustment factor returned. Combining the foregoing factors, the Court concluded the 4G royalty fees under the 2021OPPO agreement in corresponding zones (as in Table 1).

  5G multimode mobile phone

  The Court firstly recognized both the top-down approach and the comparable agreements approach as being acceptable methodologies for establishing a license royalty. Since both of these approaches have been adopted in Chinese and foreign jurisprudences, one was not superior over the other.

  (1) Top-down approach

  The basic formula to determine Nokia’s 5G multimode mobile phone royalty rate is as follows:

  (5G global cumulative rate x Nokia’s patent market strength in 5G network x Contribution weights of 5G network’s value) + (4G global cumulative rate x Nokia’s patent market strength in 4G network x Contribution weights of 4G network’s value) + (3G global cumulative rate x Nokia’s patent market strength in 3G network x Contribution weights of 3G network’s value) + (2G global cumulative rate x Nokia’s patent market strength in 2G network x Contribution weights of 2G network’s value).

  Firstly, from knowledge in the industry, precedent judgments, third-party institutional research reports and Nokia’s own declarations regarding its 4G market strength, the cumulative royalty rates for 4G and previous generation networks are found to be 6-8% for 4G, 5% for 3G, and 5% for 2G. Secondly, considering that the agreement in dispute covers only the earlier time of implementation of the 5G network in smartphones and also that there is no strong evidence to demonstrate that 5G contributes significantly more than 4G, 5G technology is found to account for approximately 50% of the value of smartphone communication. Hence, the intergenerational contribution weights of the networks’ values from 5G to 2G are 50%: 40%: 5%: and 5%, respectively. As for the global cumulative licensing rate for the 5G standard, OPPO’s experts have used an economic model to derive a figure of 4.341%-5.273% for a three-year term.

  It is interesting to note that the Court evaluated the market strength of Nokia’s 5G to 2G SEP based on the “number” of Nokia’s declared patents and pending applications in the totality of the SEPs in a given generation network rather than the “validity” or vulnerability of patents or applications in the pool. As the Court stressed, taking quantity over quality is acceptable in the present case because the size of the SEP sample pool was so great. Nevertheless, the Court noted that if Nokia were able to submit evidence of a significantly higher or lower quality of its patents in the pool, such evidence may be factored into the evaluation.

  (2) Comparable agreement approach (in conjunction with the partial conclusion from the top-down approach)

  Based on the 4G multimode mobile phone royalty rate in the 2018OPPO agreements (as previously explained) and the fact that the value contribution weights of 5G mono-mode mobile phones and 4G multimode mobile phones are 50% each, the equation for a 5G multimode mobile phone is as follows:

  5G multimode mobile phone’s royalty rate for the duration of a new license = 5G mono-mode royalty rate x 5G contribution ratio (50%) + 4G multi-mode royalty rate x 4G contribution ratio (50%).

  Although Nokia argued for the resolution of terms and conditions in the Xiaomi agreement to be used as an additional example for comparison, the Court found this unnecessary since the way in which Nokia had resolved the Xiaomi agreement did not comply with the Court’s intermediate conclusions. The Xiaomi agreement was somehow ambiguous in its contractual language. Nokia as the defendant bore the burden of proof, but it failed in this regard meaning that what presented to the Court were only assumptions rather provable facts. The Court could not come to a solid evaluation on the basis of Nokia’s allegations.

  Finally, for the 5G multimode mobile phone royalty fee, the Court made its calculations using both the top-down and comparable agreement approaches. Since the figures are lower, and therefore supposedly more favorable to Nokia, as a result of the comparable agreement method, the Court determined the fees accordingly (see Table 1).

  *Zone 1 refers to the countries or regions with GDP equal to or greater than USD 20,000; Zone 2 refers to Mainland China; and Zone 3 refers to all other countries or regions.

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