We commented in our last quarterly briefing on the phenomenon of patent privateering in the TMT sector, in the context of a dispute between Unwired Plant and Huawei and others (see here). The long-running global dispute between Vringo and ZTE is another example of patent privateering. Vringo Infrastructure, Inc. (“Vringo”) is the owner of a global patent portfolio of standards-essential patents (“SEP”) relating to wireless communications infrastructure, which it acquired from Nokia in August 2012 (subject to some form of revenue sharing). A case management hearing in the English Patent Court in June 2015 provided some further light on negotiation of FRAND terms in patent licensing, which we outline below. However, the FRAND issues never fell to be decided fully, as the parties entered into a global settlement of the dispute in December 2015. The terms of the settlement, to the extent publicly available, provide an insight into current trends in the patent asset values.

What?

FRAND licensing negotiations

Vringo initially approached ZTE with an offer of a global licence under its portfolio of SEPs. ZTE refused the offer, expressing willingness to take a licence for the UK to any SEP that was proved to be valid and infringed. Vringo therefore commenced a global campaign of infringement actions against ZTE, including proceedings in Australia, Brazil, France, Germany, India, Malaysia, the Netherlands, Romania, Spain, the UK and the US.

Following a decision on FRAND terms by the English Court in Unwired Planet v Huawei & Others [2015] EWHC 1029 (Pat) (24 April 2015), Vringo shifted position. It agreed to put forward a revised licensing offer, on the basis of a licence solely within the UK under EP(UK) 1 212 919 (the single SEP which the Court had established in an earlier technical trial in November 2014 was valid and infringed). However, it is worth noting that Vringo maintained that it was not obliged to put forward an offer on this basis, and was doing so voluntarily.

This concession by Vringo meant that the main issue remaining between the parties in the UK proceedings was the royalty rates. Vringo’s position was that a FRAND royalty is 2% on the eNodeB infrastructure that would be sold by ZTE. Since the price of an eNodeB box was approximately £120,000, this amounted to a royalty of £2,400-3,000 per eNodeB box.

ZTE countered that the royalty rates should be calculated by reference to the smallest saleable compliant part (“SSCP”) of the relevant product. On this basis ZTE argued that the royalty rate should be 0.002% of ZTE’s relevant turnover in the UK, which works out as a royalty of £2.40 per unit eNodeB box. The parties were therefore apart by a factor of x1000, which illustrates the difficulties of negotiating the royalty rate in a FRAND negotiation.

The notion of SSCP is a feature of US law, and has played an important role in leading US patent judgments determining a FRAND royalty or royalty range, such as Microsoft v Motorola and In re Innovatio. The IEEE also announced in February 2015 that it would be changing its IP policy to enshrine the role of SSCP in the FRAND commitment imposed by the IP policy. However, there is no equivalent basis in English law for SSCP. Moreover, Vringo argued that SSCP cannot be a relevant factor in the calculation of a FRAND royalty unless the defendant can show that it actually sells the SSCP as a separate item rather than part of a finished product (i.e. it is “saleable” in addition to being the “smallest compliant part”)

The global settlement

These issues were due to go to trial early in 2016. In December 2015, Vringo announced a $21.5 million global settlement with ZTE bringing the patent dispute to an end and dismissing all other pending litigation. In return for this payment ZTE receive a perpetual non-exclusive licence under Vringo’s SEP portfolio.

So What?

The pay out by ZTE was almost 60% of Vringo’s market cap at the time of the settlement. It was almost exactly the same amount as the cash payment which Vringo was reported to have made to Nokia to acquire the network infrastructure patents in question. On that basis, it could be seen as a good deal, and one which will help Vringo monetise the patents vis-à-vis other network infrastructure operators.

On the other hand, the settlement amount was significantly lower than the predictions made by investors and seasoned telecoms patent litigation commentators, some of whom were predicting any deal to be worth hundreds of millions of dollars. The real benefit to Vringo will be even more modest, once the costs of Vringo’s wide-reaching litigation campaign against ZTE are taken into account and Nokia takes its share of the payment.

This gives an interesting insight into the current state of the patent market, where the valuation of patents as assets are down compared with a few years ago, when patent portfolios were attracting astronomical valuations. Legislative reform in the US, anti-patentee jurisprudence and anti-patent assertion entity lobbying have made it harder for a patent owner to enforce its rights and hence generate returns from a patent monetisation campaign.

Another unusual feature of the Vringo v ZTE dispute was the wide geographical spread of Vringo’s patent assertion campaign against ZTE. Historically, patent assertion entities have focused almost entirely on litigation in the US courts, with the outcome in the US serving as a proxy for negotiations over a global FRAND licence. However, national security concerns in the US have restricted ZTE’s operations there, so Vringo was forced to develop a patent assertion campaign featuring Asia, South America and Eastern Europe, where ZTE has its major operations, in order to maximise pressure on ZTE.

The Vringo v ZTE dispute marks a watershed, in which the position in markets outside the US (in particular the EU, India, China and Brazil) play an enhanced role in determining the outcome of global FRAND licensing negotiations, with the US diminishing in importance. We discuss elsewhere in this quarterly briefing the attractiveness of the upcoming Unified Patent Court to patent assertion entities, which suggests that the trend for patent litigation outside the US to play a growing role in patent assertion entity strategies will only continue.

Finally, there is some anecdotal evidence that the decline in patent portfolio valuations evidenced by Vringo v ZTE is being reversed due to the attractiveness of the upcoming Unified Patent Court to patent assertion entities. Existing European patents (and future unitary patents) are predicted to enjoy enhanced asset valuations and could take over from US patents as the most valuable part of a global patent portfolio.