FRAND Commitments and Royalties for Standard Essential Patents

Abstract

This chapter addresses the conceptual and practical effect of Fair, Reasonable, and Non-Discriminatory (FRAND) commitments to standard setting organizations (SSOs) on royalties for standard essential patents (SEPs). While SSO activities are recognized as potential sources of economic efficiency, the nature of the SSO process facilitates and requires communication and agreement among parties that may otherwise compete in the marketplace, thus leading to antitrust agencies and private counsel to require caution in the standard setting process. The industry-wide, international scope of technological agreement in SSO activities is a potential source of market power for intellectual property owners. The risk of such market power has led technology adopters to seek assurances from technology contributing SSO participants that technologies adopted in the standard are made available on FRAND terms. In addition, it has become increasingly common for technology contributors to provide FRAND commitments in conjunction with their SSO participation. Recent decisions by U.S. courts and regulatory agencies have clarified that FRAND commitments can be binding on technology contributors, and that determination of FRAND royalty rates on standard essential technology can be meaningfully different from that applicable to technology unencumbered by FRAND commitments. More specifically, determination of FRAND royalty rates likely requires inquiry into the apportionment of inherent technology value from value that resulted from the SSO process and standard itself. This chapter addresses various methods to evaluate the sources of economic value of SEPs, to apportion inherent technology value from that resulting from a standard, and the implications of such apportionment on the royalties for FRAND encumbered SEPs.