Abstract
In the context of standards development, the current mechanism of negotiation of FRAND royalties frequently brings to undesirable litigation. This is mainly due to the fact that a relevant part of the information concerning the standard, required to stipulate complete license contracts, is revealed only after the standard itself has spread in the market. In this respect, we propose a litigation-reducing algorithm to determine the FRAND level of the licensing royalty. Unlike the current negotiation mechanism, this algorithm can be defined ex-ante, so to increase contract completeness, because it includes a Bayesian-updating rule, able to address the presence of ex-ante uncertainty. We derive the algorithm from a generic oligopolistic-competition model, so to deliver characteristics of applicability to both price and quantity competition. Simulations in a linear-Cournot framework suggest the algorithm calculates FRAND royalties and may be usefully applied to real-life cases.
Highlights
Literature reviewThere is a conspicuous number of contributions, including Chiao et al (2005), Gandal and Regibeau (2014), Lemley (2002), Parcu (2019), Sidak (2016 a, 2016 b), and Spulber (2018), clarifying the role of setting organisations (SSOs) and the rules to observe for joining firms. In this respect, the most controversial issue is represented by the prescription to license the standard on FRAND terms, since it provides guidance for intellectual property rights (IPRs) owners in the setting of the royalty rate without being rigorously defined
Introduction of timeThe model of section 3 describes the determination of the royalty rate in a deterministic set-up, since uncertainty around the future success of the standard is not taken into account
The FRAND level of royalty is established by innovators ex-post, that is, after the development of the standard and during the commercialisation of the standardised-good; this allows a desirable adjustment of the level of the royalty to the level of demand for the standard
Summary
There is a conspicuous number of contributions, including Chiao et al (2005), Gandal and Regibeau (2014), Lemley (2002), Parcu (2019), Sidak (2016 a, 2016 b), and Spulber (2018), clarifying the role of SSOs and the rules to observe for joining firms. In this respect, the most controversial issue is represented by the prescription to license the standard on FRAND terms, since it provides guidance for IPR owners in the setting of the royalty rate without being rigorously defined. There is a conspicuous number of contributions, including Chiao et al (2005), Gandal and Regibeau (2014), Lemley (2002), Parcu (2019), Sidak (2016 a, 2016 b), and Spulber (2018), clarifying the role of SSOs and the rules to observe for joining firms.6 In this respect, the most controversial issue is represented by the prescription to license the standard on FRAND terms, since it provides guidance for IPR owners in the setting of the royalty rate without being rigorously defined. The authors suggest to treat all standard-essential patents as contributing to the development of the standard, independently of their intrinsic innovative value.7 These contributions discuss concrete methods to calculate the level of remuneration of each IPR owner according to the innovative contribution of its patent portfolio to the development of the standard. We show how to implement such a FRAND rate through an enforceable contract, so as to curb litigation
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