The Meaning of Frand, Part I: Royalties

9 The Journal of Competition Law & Economics 931

125 Pages Posted: 6 Jun 2018

Date Written: 2013

Abstract

What does it mean for a patent holder to commit to a standard-setting organization (SSO) to license its standard-essential patents (SEPs) on fair, reasonable, and nondiscriminatory (FRAND) terms? When is a royalty FRAND? Drawing from both legal theory and economic theory, I propose an interpretation of FRAND that distinguishes and reconciles the conflicting definitions of FRAND and provides courts a practical approach to identifying FRAND royalties. A proper understanding of a FRAND royalty requires recognizing the combinatorial value of standard-essential patents. That recognition reveals the fallacy in attempting to apply the “ex ante incremental value” rule to the determination of a FRAND royalty. FRAND royalties divide the aggregate royalties generated by the standard among the holders of patents essential to the standard. Such a division should maximize the surplus resulting from the standard’s creation. It must also satisfy an individual-rationality constraint for the patent holder and the licensee, thereby encouraging continued participation in the setting and implementation of open standards, as opposed to greater reliance on proprietary standards.

Keywords: FRAND, standard-essential patent, SEP, RAND, IEEE, SSO

JEL Classification: D21, D23, K11, K12, O31, O34

Suggested Citation

Sidak, J. Gregory, The Meaning of Frand, Part I: Royalties (2013). 9 The Journal of Competition Law & Economics 931. Available at SSRN: https://ssrn.com/abstract=3182749 or http://dx.doi.org/10.2139/ssrn.3182749

J. Gregory Sidak (Contact Author)

Criterion Economics, L.L.C. ( email )

1717 K Street, N.W.
Washington, DC 20006
United States
(202) 518-5121 (Phone)

HOME PAGE: http://www.criterioneconomics.com

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