What will an "interim license" between Panasonic and Xiaomi look like?

The Court of Appeals in Panasonic v. Xiaomi [2024] EWCA Civ 1143 overruled the dismissal ”of an application by Xiaomi for a declaration that a willing licensor would agree to enter into, and would enter into, an interim license of the portfolio of patents which Panasonic have declared to be essential…. Pending the determination by the Patents Court of what terms for a final license of Panasonic’s portfolio are FRAND.”

Readers of this post will be familar with the background to this dispute so I will only?briefly add some color to the sketch. It is well-known that Panasonic is active in the monetization of its portfolio of 3G and 4G SEPs. Pansonic does this through membership in a number of pools, through divestment to third parties, and as in this case through bi-lateral licensing. Panasonic no longer makes cellular products.

Xiaomi has risen fast to become the world’s number three smartphone manufacturer behind Apple and Samsung. A reasonably accurate picture of the last five years can be obtained from Xiaomi’s annual reports (shown below in Table 1.) In just the last five years, Xiaomi has sold 876m smartphones globally, earning approximately $133,6 billion. (Note that Xiaomi also sells a large number of products broadly classified as IoT which are not included in these calculations.)

So much for the facts known to me. From here forward I will engage in estimates.

Although it has not been disclosed how much Panasonic was asking, I will use $0.50 per unit to make the maths easy (and to make it easy for the reader to scale my results to their own assumptions.) This would have been Panasonic’s hypothetical opening offer in the negotiation.

Past Use is usually converted to a lump sum beginning with the earliest use. At this point in time the release for past use would be calculated from 2011 until the end of 2024. An ?estimate of 1.15 billion smartphones sold across this period does not seem unreasonable. 1.15 billion devices at a royalty of $0.50 per unit results in a corresponding lump sum royalty of $575 million.

And on top of this a running royalty going forward on the order of $75m - $100mper year ”until 2029.” Let’s say this has a NPV of about 400 million dollars (again to make the maths easy.) If the entire dispute is to be resolved as a lump sum, Panasonic’s initial offer at the beginning of the negotiation would be close to $1 billion ($975 million using my numbers), the larger part of which is compensation for Past Use.

In an ordinary negotiation, a sophisticated actor like Xiaomi would know that the bill for past use is something that can be negotiated downwards and that the final negotiated FRAND rate for past use will likely look rather quite different than the opening offer. But how different?

The Court of Appeal commented:

”60. On 13 September 2024 there was a significant development in the underlying proceedings, which is that Panasonic filed a revised offer of FRAND terms. The details are confidential. The overall effect of the revised offer is to seek a lump sum payment from Xiaomi which is 62% of the lump sum previously demanded by Panasonic. While Panasonic contends that its previous offer was FRAND, and would no doubt say that the revised offer is merely intended to promote resolution of the dispute, it is at least arguable in these circumstances that the sum previously demanded by Panasonic was not FRAND. Furthermore, this development demonstrates that, if Xiaomi had accepted Panasonic’s revised Non-Enforcement Proposal shortly after it was made on 10 April 2024, Xiaomi would have significantly over-paid for the licence.”

Using my hypothetical numbers, Panasonic moved from $975 million to $605 million. What this tells me is that if Xiaomi had made a reasonable counter-offer shortly after it had received Panasonic’s revised Non-Enforcement Proposal on 10 April 2024, they could have more than likely reached an agreement at this same amount - or probably less - and avoided this litigation. This is moreover the usual trajectory of good faith negotiations from buying and selling cars on the TV program Wheeler-Dealers to SEP FRAND negotiations. To conclude that an opening offer padded to leave room for negotiation was not FRAND is to disavow the very notion of FRAND as a commercial process.

The Court of Appeal says a willing licensor would be agree to and enter into (i.e., grant, to use the language of §6.1) an interim license with Xiaomi. So what will this ”interim license” look like? The Appeal Court outlined this interim license in (?100) as follows: ”First, the period of the interim license should be from 2011 until the license determined by the Patents Court takes effect (rather than until the end of 2029). The latter date is assumed to be 31 Dec 2024. The sum payable will split the difference between Xiaomi’s offer and Panasonic’s revised non-enforcement proposal. It might have been easier to say that Panasonic’s offer would be divided by two.

Panasonic already made a big move from (theoretically) $0.50 per unit to $0.32 per unit and now the Court of Appeal will reduce this by another 50% (i.e., splitting the difference between Panasonic's revised offer, and rounding Xiaom's offer to the closest whole number, zero.) This makes the interim license around $0.16 per unit. If my estimate that Xiaomi sold 1.15 billion smartphones between 2011 and the end of Dec. 2024, the spilt-the-difference lump sum for an interim license and interim release for past use would be $184 million.

I am not sure if splitting the difference results in a fair treatment of Xiaomi. My hypothetical estimate of $0.16 per unit is similar to the royalty rate of $0.175 awarded by the Patents Court to InterDigital and applied to the 675.5 million units sold by Lenovo. If the Patents Court is as parsimonious in its FRAND rate determination for Panasonic, splitting the difference could result in Xiaomi significantly overpaying for an interim license. As such, Xiaomi will not want to lose the opportunity of this interim license to negotiate a complete resolution.