Competition in Information Technologies: Standards-Essential Patents, Non-Practicing Entities and FRAND Bidding

Posted by D. Daniel Sokol

Herbert J. Hovenkamp (University of Iowa – College of Law) discusses Competition in Information Technologies: Standards-Essential Patents, Non-Practicing Entities and FRAND Bidding

ABSTRACT: Standard Setting is omnipresent in networked information technologies. Virtually every cellular phone, computer, digital camera or similar device contains technologies governed by a collaboratively developed standard. If these technologies are to perform competitively, the processes by which standards are developed and implemented must be competitive. In this case attaining competitive results requires a mixture of antitrust and non-antitrust legal tools.

FRAND refers to a firm’s ex ante commitment to make its technology available at a “fair, reasonable and nondiscriminatory royalty.” The FRAND commitment results from bidding to have one’s own technology selected as a standard. Typically the FRAND commitment is not a promise to charge any particular price, but only a price that meets FRAND expectations. This permits members of a standard setting organization (SSO) to focus on technical issues and worry about the price later. Two important questions that a FRAND commitment typically leaves open is the royalty base and the royalty rate. A strong case can be made that the base should be the smallest saleable unit containing the patented technology. While that base is not entirely free from problems, it does provide a more-or-less common currency. The FRAND obligation that the rate be nondiscriminatory typically, but not always, provides a set of yardsticks for measuring the rate.

The non-practicing entity (NPE) that voluntarily declines to participate in an SSO process should generally be held to the FRAND royalty as its measure of its damages, even though its particular patents are not FRAND-encumbered. In this case a “reasonable” royalty is the royalty that the patent holder would have obtained in the competitive market in which it might have participated. The case for limiting NPE damages in this way is strongest when the NPE had actual or objectively reasonable knowledge of the SSO process but declined to participate. The case is weakest when the SSO’s processes were not well communicated to outsiders or the NPE in question was not permitted to participate.

FRAND commitments should “run with the patent,” in the sense that owners of FRAND-encumbered patents should not be able to free them simply by assigning the patents to someone else. One fundamental principle of property law is that a property owner cannot transfer away a larger interest than it owns. The entire FRAND commitment process would be worthless if patent holders were able to evade it by the simple device of assigning encumbered patents in order to remove the encumbrance.

The question of injunctive relief is only a little more complex. A FRAND commitment is on its face an offer to license to all who employ that patent in their standards-compatible product. True, the precise royalty terms are typically not specified in advance, but that entails that the FRAND royalty will be determined by reference to common indicia such as rates paid for similar technologies in the same or perhaps another situation. Further, the FRAND commitment effectively turns the royalty issues into a breach of contract claim rather than a litigated royalty claim. Permitting the owner of a FRAND-encumbered patent to have an injunction against someone willing to pay FRAND royalties is tantamount to making the patent holder the dictator of the royalties, which once again is the same thing as no FRAND commitment at all.