FRAND Developments, Part 1

As reported last Friday on the Essential Patents Blog, the U.S. ITC issued a notice terminating the investigation prompted by InterDigital's complaint against Nokia and ZTE, which was the subject of ALJ Essex's Initial Determination that I blogged about here.  The Commission "takes no position on the FRAND issues raised by the respondents concerning their affirmative defenses. The Commission finds that it is in the interest of the efficient use of administrative, judicial, and private resources for the domestic industry and FRAND issues to be decided, if at all, subsequent to final disposition of the pending appeal in InterDigital Communications LLC v. ITC, No. 2014-1176 (Fed. Cir.), which involves many of the same parties and issues with regard to related patents."

Some recent papers on FRAND-related issues include the following:

1.  Christopher Yoo has posted a paper on ssrn titled Public Good Economics and Standard Essential Patents.  I believe this is a version of the paper he was working on and that he discussed at the University of Florida workshop last September (see here).  Here is the paper, and here is the abstract:

Standard essential patents have emerged as a major focus in both the public policy and academic arenas. The primary concern is that once a patented technology has been incorporated into a standard, the standard can effectively insulate it from competition from substitute technologies. To guard against the appropriation of quasi-rents that are the product of the standard setting process rather than the innovation itself, standard setting organizations (SSOs) require patentholders to disclose their relevant intellectual property before the standard has been adopted and to commit to license those rights on terms that are fair, reasonable, and non-discriminatory (FRAND).

To date courts and commentators have provided relatively little guidance as to the meaning of FRAND. The most common approach is to impose a uniform royalty based on a percentage over overall revenue. The baseline for setting this uniform royalty is the royalty that the patentholder could have charged had the standard had not been created. In essence, this approach takes the ex ante distribution of entitlements as given and attempts to ensure that the standard setting process does not increase patentholders’ bargaining power. However, comparisons to the ex ante baseline do not provide a basis for assessing whether the resulting outcome would maximize economic welfare.

Fortunately, public goods economics can provide an analytical framework for assessing whether a particular licensing structure is likely to maximize economic welfare. Although it is often observed that patentable inventions are public goods, key concepts of public good economics (such as the Samuelson condition that provides public good economics’ key optimality criterion) are rarely explored in any depth.

A close examination of public good economics reveals that it has important implications standard essential patents and FRAND. The resulting framework surpasses the current approach by providing a basis for assessing whether any particular outcome is likely to maximize welfare instead of simply taking the existing distribution of entitlements as given and allocating them in the most efficient way.

In addition, the insight that demand-side price discrimination is a necessary precondition to efficient market provision suggests that economic welfare would be maximized if holders of standard essential patents were permitted to charge nonuniform royalty rates. At the same time, the optimal level of price discrimination would allow consumers to retain some of the surplus. It also underscores that the fundamental problem posed by standard essential patents may be strategic behavior and incentive incompatibility. The literature also suggests several alternative institutional structures that can help mitigate some of these concerns.

2.  Knut Blind and Tim Pohlmann have published Patente und Standards:  Offenlegung, Lizenzen, Patentstreitigkeiten und rechtspolitische Diskussionen ("Patents and Standards:  Disclosure, Licenses, Patent Disputes, and Legal Policy Discussions") in the August 2014 issue of GRUR (pp. 713-19).  Here is the abstract (my translation from the German):

In recent years, the interaction of patents and technological standards increasingly has led to legal disputes.  In the process, the legal interpretation of license conditions is not always meaningful, the licensing over patent pools is often interminable, and SSO bylaws not infrequently chart differing requirements.  Situations, in which a patent is infringed in the implementation of a standard, present courts, competition authorities, and SSOs with complex legal challenges.  The question arises, under which legal frameworks patents in standards support innovation or create blockages for the development of new technologies and products.  Current surveys show that firms sense a degree of legal uncertainty with regard to the licensing of SEPs.  Especially problematic  are the lack of transparency with respect to the disclosure of SEPs, the specific meaning of license conditions and the legal handling of patent enforcement.  This article discusses and analyzes the legal as well as economic aspects of the interaction between patents and standards.

3.  In the same issue of GRUR (pp. 745-50), Clemens-August Heusch has published a paper titled Missbrauch marktbeherrschender Stellungen (Art. 102 AEUV) durch Patentinhaber:  »Orange-Book-Standard« und was die Instanzgerichte daraus gemacht haben ("Abuse of Dominant Position (Article 102  TFEU) by Patent Holders:  'Orange-Book-Standard' and What the Courts of First Instance Have Made of It").  Here's the abstract, again my translation from the German:

The tension between patent and competition law is pervasive, especially in the case of SEPs which manufacturers must use in order to make standard-compatible products.  For a long time it was debated whether a competition law claim could be used to counter a claim for a patent injunction.  The BGH answered this question in the "Orange-Book-Standard" case.  In so doing, however, it presented the practitioner with a range of follow-on problems.  This essay takes up a few of them.

To be continued on Monday.