FRAND Licensing- An Introduction

Most of our daily lives are governed by technological devices – smartphone operating over 3G/4G networks, computers using WiFi, or even the now ubiquitous ear buds playing music from MP3 devices. To function, however, the technology in each component has to work together. That means the devices typically need to comply with standards, i.e., protocols by which devices communicate with each other and other technology to achieve their functionality. These standards, in turn, may implicate hundreds or even thousands of patents that claim (i.e., cover) parts of the technology that combine to make the devices work.

Standardization, if properly executed, generally leads to economic efficiency and substantial consumer benefits, Compatibility and interoperability, particularly important for IT, telecom and other network industries. Rationalization of production, economies of scale, network effects for introduction of new technologies, unified platforms for the development of new products, R&D efficiencies, etc. Increased competition and lower prices in the markets for the standardized products and components Standards “lock out” alternatives. “Thus, the owner of a patented technology necessary to implement the standard may have the power to extract higher royalties or other licensing terms that reflect the absence of competitive alternatives. Consumers of the products using the standard would be harmed if those higher royalties were passed on in the form of higher prices.”

A patent that controls any part of the technology used in a standard is called a standard-essential patent (SEP). And although these standards are critical to the modern world, they pose difficult patent-licensing problems. Once a standard is adopted, for example, the owner of an SEP will have a superior bargaining position that can be used to extract outsized revenues based on the value of the standard rather than the underlying SEP; similarly, a standard-setting organization (SSO) may be reluctant to adopt a standard in the first place if an SEP owner refuses to license it in advance because the SEP’s value is a function of the standard’s level of adoption.

 In order to prevent these types of licensing “holdups,” as well as ensure access to SEP’s so that standards can be widely adopted, SSO’s created FRAND – a requirement that SSO members license SEP’s on “Fair, Reasonable, and Non-Discriminatory” terms to other members of the SSO and, very often, non-members who use the standard. (FRAND is sometimes referred to as RAND or even F/RAND, but they are all similar.) The FRAND requirement facilitates widespread use of the standard and insures that each SEP owner benefits from use of the patent without gaining an unfair bargaining advantage.

Standard-setting organizations commonly have rules that govern the ownership of patent rights that apply to the standards they adopt, with an agreement to the obligation creating a contract as in Microsoft v. Motorola. One of the most common rules is that a patent that applies to the standard must be adopted on \”reasonable and non-discriminatory terms\” (RAND) or on \”fair, reasonable, and non-discriminatory terms\” (FRAND). The two terms are generally interchangeable; FRAND seems to be preferred in Europe and RAND in the U.S.

Fair (F) relates mainly to the underlying licensing terms. Fair terms means terms which are not anti-competitive and that would not be considered unlawful if imposed by a dominant firm in their relative market. Examples of terms that would breach this commitment are; requiring licensees to buy licenses for products that they do not want in order to get a license for the products they do want or requiring licensees to take licenses to certain unwanted or unneeded patents to obtain licenses to other desired patents (bundling).This can be explained in a simple way as a mobile hand set company barrows technology like 3G from telecommunication company, thus to take license of technology standards covered in hand set he should barrow 3G standard license as well. However there should be a Fair deal between both the companies.

Reasonable(R) refers mainly to the licensing rates. According to some, a reasonable licensing rate is a rate charged on licenses which would not result in an unreasonable aggregate rate if all licensees were charged a similar rate. According to this view, aggregate rates that would significantly increase the cost to the industry and make the industry uncompetitive are unreasonable. Similarly, a reasonable licensing rate must reward the licensor with adequate compensation for contributing its essential patents to a standard. Compensation is adequate if it provides the licensor with the incentive to continue investing and contributing to the standard in future time periods. It is worth noting that a licensor which has several different licensing packages might be tempted to have both reasonable and unreasonable packages. However having a reasonable \”bundled\” rate does not excuse having unreasonable licensing rates for smaller unbundled packages. All licensing rates must be reasonable.

Non-discriminatory relates to both the terms and the rates included in licensing agreements. As the name suggests this commitment requires that licensors treat each individual licensee in a similar manner. This does not mean that the rates and payment terms can’t change dependent on the volume and creditworthiness of the licensee. However it does mean that the underlying licensing condition included in a licensing agreement must be the same regardless of the licensee. This obligation is included in order to maintain a level playing field with respect to existing competitors and to ensure that potential new entrants are free to enter the market on the same basis.

The most controversial issue in RAND licensing is whether the \”reasonable\” license price should include the value contributed by the standard-setting organization\’s decision to adopt the standard. A technology is often more valuable after it has been widely adopted than when it is one alternative among many; there is a good argument that a license price that captures that additional value is not \”reasonable\” because it does not reflect the intrinsic value of the technology being licensed. On the other hand, the adoption of the standard may signal that the adopted technology is valuable, and the patent holder should be rewarded accordingly. That is particularly relevant when the value of the patent is not clearly known before the adoption of the standard.

 By Sanath M V