Economic Determinations in 'Frand Rate'-Setting: A Guide for the Perplexed

Abstract

Owners of standard-essential patents commit to be prepared to license their technology on “fair, reasonable and nondiscriminatory” terms and conditions. When negotiations over such terms break down, arbitrators and courts may be tasked with determining them. Such determinations face unusual obstacles, such as the frequent inapplicability of patent damages law to pricing large, standardized patent portfolios. The absence of good legal guidance is compounded by an economic narrative – the “standard FRAND paradigm” – which systematically misstates the circumstances, objectives and requirements of a proper FRAND determination, systematically favoring implementers of the standard. I contrast this static paradigm with the proper, economically consistent, dynamic paradigm. I then explain why a “FRAND rate determination” is usually difficult – starting with the threshold error of confining the determination to a “FRAND rate.” I also identify related economic errors that pervade both expert economic testimony and legal characterizations of the evidence in a typical proceeding. Because of the non-discrimination requirement, the consequences of such errors can persist indefinitely in later proceedings. In addition to highlighting these errors for prospective fact-finders, I close with a test for the legitimacy of a proposed FRAND determination.

Keywords: Standard-Essential Patents, SEP, FRAND, Patent Valuation, Patent Portfolio, Reasonable Royalty, ETSI, Holdup, Holdout

JEL Classification: K21, K33, K41, L24, L43, L51, L96