The licensing and royalty disputes between Samsung Electronics Co. and Ericsson Inc. have turned into a major legal fight across several jurisdictions. Each side has taken action in its bid to gain the upper hand. Analysts believe that this will eventually end in a settlement agreement, but the process can become complicated, lengthy, and drawn-out.
The Korean and Swedish companies have a history of licensing agreements that are often punctuated by legal battles involving patents and royalty payments. The two companies first entered into a licensing deal in 2001 that covered patents for handsets and networks and renewed this deal in 2007. After this ended, Samsung and Ericsson could not agree on the amount of royalty payments that the former needed to pay. Samsung claimed that under the 2007 license agreement, it could end up paying billions more for using Ericsson’s patents covering Galaxy S III, Galaxy Note, and Galaxy Tab 7.7, among other products.
The two continued to negotiate, but neither party wanted to budge when it came to royalty rates. In 2012, Ericson sued Samsung for patent infringement in Texas. That suit ended in a settlement agreement in 2014. Under that settlement, the Korean company paid Ericsson $650 million along with years of royalty payments.
When the 2014 agreement was about to end in 2019, the two companies began to negotiate over a new deal. After months of negotiations, Samsung and Ericsson were not able to finalize a deal. Instead, Samsung, without advance notice, filed a suit in the Wuhan Intermediate People’s Court in China on December 7, 2020.
The Wuhan suit seeks a ruling that would set the global royalty rates for them. The Wuhan court has a reputation for setting low royalty rates. Ericsson only learned about the aforementioned suit ten days after its filing on December 17, 2020.
On December 29, 2020, the Chinese court issued a global injunctive relief order on 4G and 5G standard essential patents (SEPs) and prohibited Ericsson from seeking a fair, reasonable, and non-discriminatory (FRAND) licensing rates ruling anywhere else in the world. Essentially, the Wuhan order seeks to take exclusive jurisdiction on the case despite the fact that none of the litigants have their headquarters in China. Additionally, neither party is incorporated in China. We recently covered this issue in more detail here.
The FRAND system is essential in the mobile and electronics industries. FRAND is a fundamental building block to enable global cellular connectivity. It allows for eight billion interoperable connections. Interoperability requires intellectual property holders to enter into cross-licensing agreements. These agreements can take time to close because of royalty rates.
Before receiving notice of Samsung’s suit in Wuhan, Ericsson filed its case against Samsung on December 11, 2020, with the U.S. Eastern District Court of Texas. The suit alleges that the Korean electronics company failed to negotiate in good faith and failed to license patents on FRAND terms and conditions. In essence, Ericsson alleged that Samsung wanted to pay unfairly low rates for Ericsson's patents.
With the Wuhan order at hand, Samsung sought to divest the Texas court decision with jurisdiction to proceed with Ericsson’s case. However, U.S. Judge Rodney Gilstrap ruled that the Chinese court’s order has no bearing on the U.S. case. In principle, China’s order enjoining the U.S. court from hearing Ericsson’s case is already in excess of its jurisdiction. The Wuhan court has no authority to order another court located outside of China to act in a manner dictated by the former.
Judge Gilstrap also stated in his order that to allow Samsung to block Ericsson from seeking relief in a different forum is the "height of inequity (and hypocrisy)." Both sides should have the opportunity to fight fairly as equity demands.
Early this year, Samsung also filed a case against Ericsson with the U.S. International Trade Commission (ITC). The suit seeks to stop Ericsson from importing its 5G networking equipment. According to the South Korean company, Ericsson's base stations rely on many of Samsung's patented inventions.
Samsung's choice of court in Wuhan, China is odd as neither of the companies involved has a strong connection to China. Under the principle of forum non-conveniens, a court can choose to dismiss a case where another forum or court is more suitable to hear the case.
For a forum to be proper and suitable, the party seeking relief should seek to establish a strong connection with the chosen court. In Samsung and Ericsson’s case, both have relatively weak connections to China. They have no licensing negotiators in Wuhan while each has their base in other countries. China is also not among their top markets.
In addition to this, Samsung has also said in a filing two years ago with a U.S. federal court that Chinese courts have no due process, and can be inquisitorial and antithetical to the U.S. justice system.
Despite this, Samsung’s move is unsurprising and often pursued by many multinational companies (MNCs). Royalty disputes involving multinational companies often lead to forum shopping. Each side files cases in different courts, hoping that one court would be able to issue a favorable ruling. This in turn can help them negotiate for better terms. Forum shopping, while considered a ground for the dismissal of a case in some jurisdictions, does not apply in the international arena. There is no prohibition against it. This is a legitimate strategy that MNCs employ to tilt the scales in their favor.
Aside from the Texas court, Ericsson also filed lawsuits against Samsung in the U.S. ITC, as well as in Germany, Belgium, and the Netherlands for infringement of mobile phone patents.
To date, Ericsson has filed a total of three cases against Samsung in the Eastern District of Texas court while filing three cases with the ITC. Ericsson also filed four lawsuits in Germany, and two each in Belgium and the Netherlands. In all European lawsuits, no SEPs are in dispute. All of them are claims for infringement of implementation of patents.