Pricing Patents for Licensing in Standard Setting Organisations: Making Sense of FRAND Commitments

42 Pages Posted: 26 Jun 2007  

Anne Layne-Farrar

Charles River Associates; Northwestern University

Jorge Padilla

Compass Lexecon

Richard Schmalensee

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: January 2007

Abstract

We explore potential methods for assessing whether licensing terms for intellectual property declared essential within a standard setting organization can be considered fair, reasonable, and non-discriminatory (FRAND). We first consider extending Georgia-Pacific to a standard setting context. We then evaluate numeric proportionality, which is modelled after certain patent pool arrangements and which has been proposed in a pending FRAND antitrust suit. We then turn to two economic models with potential. The first - the efficient component-pricing rule (ECPR) - is based on the economic concept of market competition. The second - the Shapley value method - is based on cooperative game theory models and social concepts for a fair division of rents. Interestingly, these two distinct methods suggest a similar benchmark for evaluating FRAND licenses, but ones which might appeal differently to the courts and competition authorities in the US as compared to Europe. We find that under any approach, patents covering essential technologies with a greater contribution to the value of the standard and without close substitutes before the standard gets adopted should receive higher royalty payments after the adoption of the standard.

Keywords: Efficiency, Fairness, Licensing, Patents, Standard Setting Organizations

JEL Classification: L24, L40

Suggested Citation

Layne-Farrar, Anne and Padilla, Jorge and Schmalensee, Richard, Pricing Patents for Licensing in Standard Setting Organisations: Making Sense of FRAND Commitments (January 2007). CEPR Discussion Paper No. 6025. Available at SSRN: https://ssrn.com/abstract=996700

Anne Layne-Farrar (Contact Author)

Charles River Associates ( email )

1 South Wacker Drive
Suite 3400
Chicago, IL 60606
United States
312-377-9238 (Phone)

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

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Jorge Padilla

Compass Lexecon ( email )

Paseo de la Castellana 7
Madrid, 28046
Spain

Richard Schmalensee

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Room E62-525
Cambridge, MA 02142
United States
617-253-2957 (Phone)
617-258-6617 (Fax)

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