Rationalizing FRAND Royalties: Can Interpleader Save the Internet of Things?

Abstract

Important technical interoperability standards may be covered by hundreds or thousands of patents held by dozens of parties. Patent holders are often required to license these patents to others on terms that are “fair, reasonable and non-discriminatory” (FRAND), and litigation regarding the level of FRAND royalties is expanding. One serious problem that has emerged is the inherent difficulty of determining a “reasonable” royalty rate for a particular standard-essential patent in isolation from the many other patents covering the same standard. Reasonable royalty determinations in litigation are made in a bottom-up manner, patent holder by patent holder, patent by patent, usually in separate proceedings. While individual royalty determinations in these proceedings may seem to adhere to judicial and contractual requirements regarding “reasonableness,” there is no reason to believe that the aggregate royalty rates established through these uncoordinated, serial processes will be reasonable in terms of the overall value that the patented technology contributes to the standard or the product. Unreasonable and inconsistent royalties on important interoperability standards create social costs by impeding value-creating transactions. To address this problem, we propose that the mechanism of statutory interpleader be used to join the holders of all patents covering a particular technology standard into a single proceeding in which an aggregate “reasonable” royalty may be determined and then apportioned among the holders of individual standards-essential patents. This approach will both enhance fairness of royalty determinations and reduce the costs inherent in multiple independent proceedings. Finding such a solution is particularly critical today, as technology convergence continues to impact standardization in key areas such as next-generation wireless communication and the “Internet of Things.”

Keywords: FRAND, Interpleader, standards, patent, standards-essential patent

JEL Classification: K00, K12, K21, K41, L86, L96, O34