Taking Contracts Seriously: The Meaning of the Voluntary Commitment to License Essential Patents on 'Fair and Reasonable' Terms
Roger G. Brooks
Cravath, Swaine & Moore LLP
Tilburg University - Tilburg Law and Economics Center (TILEC); University of Michigan Law School; Covington & Burling
March 12, 2010
The literature addressing the meaning of a commitment made by holders of patents ‘essential’ to a standard to licence such patents on ‘fair, reasonable, and nondiscriminatory’ (FRAND) terms and conditions is now substantial. While reaching quite different conclusions, a number of authors have addressed this as a question of economic theory: what limitations (if any) on the freedom of the parties negotiating a licence to essential patents will best ensure efficient outcomes?
On the basis of such analyses, authors have variously argued that, in order to satisfy a ‘fair and reasonable’ commitment, a patent holder:
• Must charge no more than the incremental value of his invention over the next best technical alternative;
• Must not negotiate for a royalty-free cross-licence as part of the consideration for a licence;
• Must set his royalty rate based on a mathematical proportion of all patents essential to the practice of a standard;
• Must set his royalty rate in such a way as to prevent cumulative royalties on the standardised product from exceeding a low percentage of the total sale price of that product;
• Must not raise requested royalty rates after the standard has been adopted, or after the relevant market has grown to maturity;
• Is not entitled to seek injunctive relief against a standard implementer should they fail to agree on licence terms.
The types of economic arguments relied on by these authors to justify these restrictive regimes may well be useful in debating public policy and the proper application of national competition law – although one of the present authors and others have elsewhere critiqued the merits of many of these calls for what is essentially government intervention in the private licencing process. But in this paper we step back to ask a different question: What do these arguments and proposed regimes have to do with the contract which is the source of the FRAND obligation?
working papers series
Date posted: March 15, 2010
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