Standardization and Technological Innovation: Some Reflections on Ex-ante Licensing, FRAND, and the Proper Means to Reward Innovators

Abstract

In today’s technology-driven world, industry standardization, device interoperability, and product-compatibility have become critical to promoting innovation and competition. Under the current system applied in most standard-setting organizations (SSOs), firms holding patents that they deem essential to a standard considered by an SSO commit to license these patents on fair, reasonable and non-discriminatory (FRAND) terms. This system, which has allowed standardization to proceed in a wide range of sectors, is currently under attack by firms suggesting that it may lead to opportunistic behaviour on the part of essential patent holders. Proposals have thus been made in a variety of fora to replace the current FRAND regime. They include the development of a regime of ex ante auctions run by SSOs, which would allow SSO members to choose among the various bids made by essential patent holders (the Swanson-Baumol model) or a system of joint negotiations by essential patent holders and standard implementers of licensing terms. Proposals have also been made by some members of ETSI that its current IPR policy be revised in order to introduce the principles of “aggregated reasonable terms” and “proportionality” into the definition of FRAND. This paper argues that these proposals are flawed because they are based on a series of misconceptions. Their implementation would also be highly impractical, raise antitrust concerns, and harm innovation.