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Can Standard-Setting Lead to Exploitative Abuse? A Dissonant View on Patent Hold-Up, Royalty Stacking and the Meaning of FRAND

Damien Geradin

George Mason University School of Law; Tilburg University - Tilburg Law and Economics Center (TILEC)

Miguel Rato

Partner at Shearman & Sterling LLP

April 2006

Standard-setting activities, which aim to achieve device interoperability and product compatibility, play a fundamental role in fostering innovation and competition in a variety of markets. Such activities, typically carried out by armies of engineers, would generally not be expected to fascinate lawyers and economists. But they do - and they have recently received much attention as a result of high-profile cases, complaints lodged with competition authorities, and attempts by members of Standard-Setting Organizations ("SSOs") to have their rules and procedures modified to prevent allegedly anti-competitive outcomes. There seems to be a growing perception, largely fed by certain interest groups, that current standard-setting procedures generally based on the so-called FRAND licensing regime unduly allow opportunistic holders of Intellectual Property ("IP") embedded in a standard to extract excessive royalties from their licensees.

Against this background, the objective of this paper is to demonstrate that the existing FRAND regime works. Ongoing proposals to alter it by tilting the bargaining position of licensors, in particular that of pure innovators, in favour of licensees are not only unnecessary, being based on false premises, but would also prove detrimental to investment and innovation. Fortunately, these attempts, and in particularly those to amend the rules and procedures of SSOs', have so far been unsuccessful. They remain nevertheless a constant threat.

This paper is divided in seven parts. Part II describes the main features of standard-setting processes, their significance and the strategic battles that may affect them. Part III focuses on the FRAND licensing regime traditionally prevalent in SSOs. Under this regime, owners of IPR that are essential to the standard typically commit to license such patents on "fair, reasonable and non-discriminatory terms". This Part begins by describing the scope of FRAND commitments. It then reviews the various meanings that have been attributed to the concept of FRAND and argues that a "FRAND royalty" cannot be determined in the abstract. Finally, the argument is made that, contrary to what has been suggested by a number of authors, by giving a FRAND commitment an owner of essential IPR cannot be deemed to have waived its fundamental right to seek injunctive relief in case its rights are infringed. Part IV reviews a number of academic studies which argue that the current FRAND regime has proved inadequate to prevent the emergence of a raft of perceived problems: anti-commons, patent thickets, patent hold-up, patent hold-outs, royalty stacking. It is shown that these studies have been seriously challenged and are subject to significant limitations. Moreover, it is argued that they fail to provide any empirical evidence of the problems denounced. Part V examines various proposals that have been made to reshape the FRAND regime. It shows that these proposals, most of which endorse - in one way or another - a compulsory regime of ex ante licensing, would create insurmountable practical difficulties and could raise serious competition law concerns. Part VI considers the applicability of Article 82 of the EC Treaty to claims of excessive-pricing in the IP and standard-setting context. It shows that, should they be pursued, such claims would raise numerous conceptual and practical difficulties. Determining the competitive price of a tangible good is a notoriously complex undertaking, hence the European Commission's understandable reluctance to pursue excessive pricing cases except in a narrow set of circumstances. The potential for error will only be compounded when one deals with intangible assets. For these reasons, determination of appropriate royalty levels for valuable IP should be left to the market. Finally, Part VII contains a short conclusion.

Number of Pages in PDF File: 56

Keywords: standard setting, standardization, intellectual property, abuse of dominance, FRAND, patent hold-up, patent thicket, anti-commons, royalty stacking, innovation, excessive prices, royalty rates, licensing, patent, patent ambush, antitrust, competition, disclosure, ETSI, mobile communications

JEL Classification: D21, D22, D42, D44, K00, K21, L12, L40

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Date posted: November 24, 2006  

Suggested Citation

Geradin, Damien and Rato, Miguel, Can Standard-Setting Lead to Exploitative Abuse? A Dissonant View on Patent Hold-Up, Royalty Stacking and the Meaning of FRAND (April 2006). Available at SSRN: http://ssrn.com/abstract=946792 or http://dx.doi.org/10.2139/ssrn.946792

Contact Information

Damien Geradin (Contact Author)
George Mason University School of Law
3301 Fairfax Drive
Arlington, VA 22201
United States

George Mason Law School Logo

Tilburg University - Tilburg Law and Economics Center (TILEC) ( email )
Warandelaan 2
Tilburg, 5000 LE
HOME PAGE: http://www.tilburguniversity.nl/tilec/
Miguel P.L. Rato
Partner at Shearman & Sterling LLP ( email )
HOME PAGE: http://www.shearman.com
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