Moving Away from High-Level Theories: A Market-Driven Analysis of FRAND

• Date: 01 June 2014
• Author: Damien Geradin
• Published date: 01 June 2014
• DOI: 10.1177/0003603X1405900205
• Subject Matter: Article

THE ANTITRUST BUL L E T I N :Vol. 59, N o. 2/Summ er 2014 :327

Moving away from

high-level theories: A market-

driven analysis of FRAND

BY DAMIEN GE RADIN *

The mobile communication sector is often used as an example to sup-

port claims that the FRAND regime is broken because of the risk of

hold-up and royalty stacking. Based on an analysis of market-related

data, this article argues that the allegations that hold-up and royalty

stacking have been pervasive in the mobile communication sector are

implausible. The analyzed data reveal no adverse consequences of

hold-up and royalty stacking in terms of harm to the standard-setting

process, reductions in the rate of innovation, or levels of R&D invest-

ment: It is alleged that those seeking to justify the significant reforms

to the FRAND regime on the basis of hold-up and royalty stacking

have not met the burden of proof that these reforms are necessary or

even desirable.

KEY WO RDS:Hold-up, royalty stacking, FRAND, standard-essential

patents, patent reforms, mobile communication

© 2014by Federal Legal Publications, Inc.

* Professor of Law, George Mason University School of Law and

Professor of Competition Law & Economics, Tilburg University.

AUTHOR’S NOTE: I represent ed Qualcomm in the inves tigation in itiated by th e

European Commission in 2005 for alleged abusive licensing practices. This

investigation was terminated in 2009 without a finding of infringement. I thank Kirti

Gupta and Anne Layne-Farrar for their useful comments.

I. INTRODUCTION

Standard-setting activities, which aim to achieve device interoperabil-

ity and product compatibility,1play a fundamental role in fostering

innovation and competition in a large variety of markets. A standard

can be defined as a setof technical specifications that seeks to providea

common design fora product or process.2The welfare benefits deriving

from the existence of standards are obvious. By allowing complemen-

tary or component products from different manufacturers to be com-

bined or used tog ether, sta ndards s timul ate competiti on betw een

compliant products, in turn driving innovation and consumer choice.

Standards are usually created by voluntary organizations (generally

referred to as standard-setting organizations, or SSOs) composed of par-

ticipants (such as companies and research institutions) from a given

industry (such as electronic components and communications).3SSO

membersmeet to discuss,analyze, refine, and ultimatelyadopt mutually

acceptable standards, which ensure that competing and complementary

products and components are compatible and can interoperate.4SSOs

have thusgained particular importance intechnology-driven sectors.

328 :THE ANT I T R U S T BULLETIN:Vol. 59, No. 2/Summer 2014

1According to the Institute of Electrical and Electronics Engineers

(IEEE), technology standards “form the fundamental building blocks for

product development by establishing consistent protocols that can be univer-

sally understood and adopted. This helps fuel compatibility and interoper-

ability an d simplifi es product d evelopme nt, and spee ds time-to -market. ”

IEEE Stan dard s Ass’ n, Wh at Are S tand ards ?, ht tp:/ /sta ndard s.ie ee.o rg

/develop/overview.html (last visited Apr. 30, 2014).

2See HERB ERT HOVENKAMP, MARK D. JA NIS & MA RK LEMLE Y, IP AND

ANTITRUST: ANANA LYSIS OF ANTITR UST PRINCIPLES APPLIED TO IN TELLECTU AL

PROPERTY LAW § 35.1 (2003–04 supp.).

3For instance, the European Telecommunications Standards Institute

(ETSI), headquartered in Sophia Antipolis, France, was formed in 1988 by the

European Conference of Postal and TelecommunicationsAdministrations and

is officia lly recogn ized by the E uropean Com mission a s the organi zation

responsible for standardization of information and communication technolo-

gies within Europe. See generally, Mark Lemley, Intellectual Property Rights and

Standard-Setting Organizations, 90 CALIF. L. REV. 1889 (2002).

4SSOs are not the only source of standards. Standards may also be

created by regulation. In some cases, a product or process developed by a

firm may also become so popular that it becomes a de facto standard.

Standards may be encumbered by patents when the technologies

they implement are proprietary. This is often the case in the informa-

tion technology industry, where a given standard may rely on a large

number of patented technologies (referred to as standard-essential

patents or SEPs) held by a variety of companies. Patents are exclusive

rights which confer upon their owners two basic prerogatives: (1) the

right to prevent any third party from applying or using the subject

matter of the patent; and (2) the right to set the conditions of a license

in consideration for use of the patent as a reward for the innovative

contribution made. This means that manufacturers cannot lawfully

implement a standard unless they obtain licenses from all the SEP

holders.5These patent holders have a right to obtain compensation,

which can take the form of an upfront cash payment, the payment of

running royalties, a cross-license, or other forms of consideration.

Most formal SSOs have intellectual property right (IPR) policies,

which generally encourage patent owners involved in standardiza-

tion to disclose upfront, prior to the standard’s adoption, any patents

that they consider essential.6Once disclosure is made, or contempora-

neously with disclosure, patent holders are typically asked to provide

an assurance or commitment that, should their patents be essential for

a standard, they will license them on fair, reasonable and nondiscrim-

inatory (FRAND) terms to members of the SSO and outsiders.7The

MA R K E T - D RIVEN AN A L Y S I S :329

5From the perspective of a manufacturing company seeking to imple-

ment and commercialize a standard, the patents are strict complements: The

company needs to obtain licenses for all SEPs in order to be compliant with

the standard and, equally important, to avoid the risk of being sued for

patent infringement.

6Early disclosure of patents “is likely to enhance the efficiency of the

process used to finalize and approve standards” and “permits notice of the

patent to the standards developer . . . in a timely manner, provides partici-

pants the greatest opportunity to evaluate the propriety of standardizing the

patented technology, and allows patent holders and prospective licensees

ample time to negotiate the terms and conditions of licences . . . .” Am. Nat’l

Standards Inst., Guidelines for Implementation of the ANSI Patent Policy 3,

availa ble at http://www.nfpa.org/~/media/Files/Codes%20and%20stan-

dards/Regulations%20directory%20and%20forms/ANSI_NFPA_Patent_Pol-

icy.pdf(last visited, May 19, 2014).

7European Telecomm. Standards Inst., IPR Policy, art. 6.1, available at

http://www.etsi.org/images/files/IPR/etsi-ipr-policy.pdf (last visited May