NAIP Patent Blog

By Charl Goussard – NAIP Legal Research
and Jeffrey Chang – NAIP Editorial

Introduction

Imagine a single product: the myriad technologies involved, the swarm of patent rights holders, and the sea of comparable, alternative technologies. With so many complex and conflicting issues, it seems unlikely that an easy to use, functional product can ever reach the consumer. Yet, cell phones have become everyday objects. Dozens of companies put out hundreds of models that can be used interchangeably (for the most part) with different networks across the globe. This has been the power of FRAND patent licenses.

"FRAND" (Fair, Reasonable and Non-Discriminatory) is an acronym used to describe patent licensing terms. Despite an ambiguous nature, FRAND terms are a legal obligation imposed on IPR holders by certain standard setting organizations (SSOs). In exchange for providing FRAND terms to licensees, the IP is often made or included in an industry standard.

In this light, the FRAND concept has much significance for IPR holders, licensees, entire industries and even society. An IPR holder who successfully has his patent incorporated into a standard effectively guarantees a revenue stream. A licensee, often a manufacturer, is provided with a product roadmap of sorts, as well as a guaranteed market. The industry is able to simplify and consolidate its efforts behind a single technology to speed up adoption, and as a result, speed up the development and advancement of society.

But each advantage is countered by a disadvantage, and the ambiguousness of words like "fair" and "reasonable" too easily leads to dissenting interpretations. Controversy over FRAND has only increased—as evident in famous cases like Broadcom vs. Qualcomm and most recently Nokia vs. IPCom. What are the issues? What is at stake? In this paper we will attempt to address these topics and hopefully, clear up some of the confusion about FRAND.


Understanding FRAND

FRAND is inherently a controversial concept. What are fair, reasonable and non-discriminatory licensing terms? Considering the complexity and subjectivity of IP/patent valuation, FRAND terms may be vastly different for the licensor and licensee. Why even bother with FRAND then? Why not simply allow the forces of the (mostly) free markets to decide? To begin understanding FRAND, let us first look at some of the more tangible elements of its history, purpose and definition.

Background

FRAND is a concept that first became prominent in the 1970s and 1980s amid the promising developments in networking/telecommunications technologies. Like the standardization of railroad track sizes or measurement systems, world and businesses leaders saw great opportunity for growth and advancement of society in these technologies.

But at the same time, increasing commercialization of patents led them to fear that the business and politics of patents would hinder this growth. SSOs were established as a way evaluate and choose between competing technologies and facilitate their propagation. One of the tools developed to deal with concerns of IPR holders and potential licensors was the concept of FRAND terms.

Purpose & Function

FRAND's function and purpose varies only slightly in each context, but these differences result in widely differing expectations and definitions for FRAND. For this paper we’ll look primarily at FRAND in context of standard setting.

As an integral part of SSOs' agreements, the general consensus is that FRAND serves to:

1. Provide contributors incentive to reveal and contribute technologies (through opportunities to maximize and optimize market price and volume).

2. Allow SSOs to select and implement the best available technologies.

3. Ensure a competitive outcome in a potentially monopolistic/oligarchic market that might result from the setting of a standard.

From these general principles, FRAND can be seen as a mechanism that attempts to allow an optimal competitive market to develop for the benefit of all the participants and society in general. Although individual parties may claim otherwise, this purpose and function seems to be most in line with the background and "spirit" of FRAND.

Implementation

The exact origins of the phrase "fair, reasonable and non-discriminatory" have not been documented, but it likely gained prominence due to its inclusion in the IPR policy of the European Standard Setting Organization (ETSI), established in 1988. Today nearly every major standards organization has implemented FRAND obligations in one form or another.

In the ETSI Rules of Procedure, Annex 6: IPR policy, FRAND appears in Clause 6.1:

When an ESSENTIAL IPR relating to a particular STANDARD or TECHNICAL SPECIFICATION is brought to the attention of ETSI, the Director-General of ETSI shall immediately request the owner to give within three months an irrevocable undertaking in writing that it is prepared to grant irrevocable licenses on fair, reasonable and non-discriminatory terms and conditions under such IPR to at least the following extent:

● MANUFACTURE, including the right to make or have made customized components and sub-systems to the licensee's own design for use in MANUFACTURE;
● sell, lease, or otherwise dispose of EQUIPMENT so MANUFACTURED;
● repair, use, or operate EQUIPMENT; and
● use METHODS.

For any IPR to be included in an ETSI-backed standard, the IPR holder must agree to Clause 6.1 in the ETSI IPR Licensing Declaration Form.

"Defining" FRAND

As is evident from above, FRAND is purposely left ambiguous and defining it is very much a case of circumstances. However, that hasn't stopped people from attempting. In court cases such as Nokia vs. Qualcomm, parties have sought to request judges to narrow down the meanings of FAIR, REASONABLE and NON-DISCRININATORY. But up to now, no judge has had the universal wisdom to put a foolproof meaning to these generic terms.

The fact is FRAND is merely a guideline that should be interpreted within the scope of its technical, cultural, and business environment. Detailing FRAND terms could have the adverse effect of excluding the freedom to negotiate – having exactly the opposite effect on the purpose and function of FRAND. FRAND should not be used to benefit any one party to the disadvantage of another.


What do FRAND terms offer me?

A good understanding of the benefits and disadvantages of FRAND can assist participants and interested parties to an SSO to evaluate their negotiating strength.

IPR Holders

Advantages

• By employing FRAND terms, IPR holders are in a position to attract more licensees and to generate more royalties.

• Standards (ex. Mobile phone industry), which use FRAND licensing terms are used by huge numbers of manufacturers, increasing the potential royalty income for a holder of an essential patent in that standard.

• By employing FRAND terms, IP holders are in a position to negotiate cross-licenses with licensees, thereby strengthening their own patent portfolios.

Disadvantages

• Under anti-trust/anti-competition legislation in various countries and/or regions, IPR holders can be forced to license their exclusive patent rights under FRAND terms.

• The terms of the licensing agreement are restricted by the FRAND limitations.

• FRAND creates uncertainty – there is no universal guideline as to what FRAND means – every licensing deal should be dealt with separately.

Licensees

Advantages

• FRAND terms provide licensees with the right to demand a license to essential patents – on condition that such patent(s) are essential to the standard.

• Licensing under FRAND terms has a lower transaction cost than separate licensing.

• One-stop shopping for licensees – by obtaining licenses to the essential patents of a standard, licensees avoid the time-consuming exercise of searching individual patents which might be infringed by the technology.

• Decreased risk of infringement.

• Cross licensing opportunity with IPR holder (if the licensee has essential patents of his own).

Disadvantages

• FRAND terms are uncertain/ambiguous – royalty rates are not clear and "fair and reasonable" is usually not defined.

• Collusion by IPR holders, who are members of a patent pool or standard setting body, may easily appear.

• IP holders may manipulate the standard setting process: they may wait for a wide adoption of the standard before disclosing their patent and then charging excessive royalty fees to those who employ the standard.

• FRAND terms can be used to force a licensee to buy a patent that they don't really need.

Markets/Society

Advantages

• Standards are open to all who can afford the FRAND terms.

• Pooling patents and licensing them under FRAND terms can be welfare enhancing.

Disadvantages

• FRAND terms may impact fair trade by monopolizing the market and fixing prices.

• Quantifying FRAND is very hard – the uncertainty of fair and reasonableness leaves the door open to disputes that are difficult to judge.

Conclusion

FRAND terms can act as a helpful measurement of strength in a fair and competitive market. It can guide participants into collaboration on terms and conditions mutually agreed upon, without adversely affecting third parties or society as a whole. A word of warning though: FRAND terms do not guarantee any specific outcome. The ultimate result of any license negotiations depends on the positions of the parties, market forces and the socio-political and economic environment in which the parties operate.

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