AN ECONOMIC INTERPRETATION OF FRAND

Abstract

Standard-setting organizations have, for many years, required members to commit to license patents essential to use of standards on fair, reasonable, and non-discriminatory (FRAND) terms. Unfortunately, SSOs have not defined what FRAND means, leaving its interpretation to courts and regulators. This article explains the economic concerns underlying FRAND—hold-up and strategic behavior, leading to inefficient behavior in a standard-setting context—and how a proper economic interpretation of FRAND can eliminate or mitigate those concerns. Ex ante analyses based on the “reasonable” principle can potentially eliminate hold-up, but, as a practical matter, may be costly, difficult to perform, and error-prone. In such circumstances, the “non-discriminatory” principle of FRAND can provide some protection against hold-up even when the “reasonable” principle of FRAND does not.