Journal Article

THE MEANING OF FRAND, PART I: ROYALTIES

J. Gregory Sidak

in Journal of Competition Law & Economics

Volume 9, issue 4, pages 931-1055
Published in print December 2013 | ISSN: 1744-6414
Published online December 2013 | e-ISSN: 1744-6422 | DOI: http://dx.doi.org/10.1093/joclec/nht040

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  • Technological Change; Research and Development
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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: D21; D23; K11; K12; O31; O34

Journal Article.  56828 words.  Illustrated.

Subjects: Technological Change; Research and Development ; Property Law ; Production and Organizations ; Contract Law

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