Some inventors are fortunate enough to create a technology or device that becomes what is called a “standard essential” technology/device for an entire industry. Generally speaking, “standard essential” technology is that which is necessary to ensure compatibility between similar products made by different manufacturers. Consider a typical smartphone. A smartphone made by one company will connect with a smartphone made by a different company. This compatibility is made possible by industry standards.

Industry standards are created and maintained by “standard-setting organizations” (“SSOs”). Many SSOs are wholly embedded within their industries; others are formed by governments and have a quasi-government status. Many other SSOs have both features.

As noted above, an inventor that creates (and patents) a standard essential technology is fortunate indeed. Because the technology is “essential” to the industry standards, the patent holder can expect to license their technology to many manufacturers and end-users and, consequently, can expect to receive a lot of royalty fees. However, there is a danger here because a patent holder of a standard essential technology could demand very high and industry-damaging royalty fees. By its nature, a patent gives its holder a monopoly on manufacturing, selling and licensing the invention.

SSOs are aware of this potential danger. As such, it has now become routine for SSOs to demand that, before any technology/device will be deemed “standard essential,” the holder of the patent must declare to the SSO its willingness to issue patent licenses on the basis of FRAND terms. FRAND stands for “fair, reasonable and nondiscriminatory.” A patent holder’s agreement to provide licenses on FRAND terms is intended, essentially, to be a contract between the SSO and the patent holder for the benefit of the licensees. SSOs do not mandate what FRAND terms are, or identify what FRAND royalty rates would be or even become involved in proposing FRAND licensing provisions. It is for the patent holder and the various licensees to negotiate what constitutes FRAND terms.

Disputes over whether a given patent license and/or royalty rate is FRAND has generated quite a bit of litigation over the last couple of decades. When a patent holder and would-be-licensee dispute whether a license is consistent with FRAND terms, the parties must litigate. The resulting litigation is not, strictly speaking, patent litigation. Rather, the causes of action sound more in contract law and in doctrines related to good faith and fair dealing. That being said, often, FRAND cases also have causes of action for patent infringement since the patent holder and licensee may have been engaged in business for some time.

In FRAND cases, the most vexing legal issue is usually the question of whether the royalty rate is FRAND. In general, the patent holder will demand a royalty rate based on the cost of the whole device — like a smartphone — whereas potential licensees argue that a proper FRAND royalty rate would be based on components.

Contact Revision Legal For more information or if you have an invention that you want to patent, contact the patent lawyers at Revision Legal at 231-714-0100.

How FRAND Disputes Are Litigated: Contract vs. Patent Law

FRAND disputes occupy a unique intersection of patent law, contract law, and antitrust law. When a standard-essential patent (SEP) holder and a would-be licensee disagree about whether proposed royalty terms are FRAND-compliant, they face a threshold question: which court has jurisdiction and under what legal theories? Because the FRAND commitment is a promise made to a standard-setting organization (SSO), the dispute is fundamentally contractual—the SSO and its member licensees are third-party beneficiaries of the FRAND commitment. Pure patent infringement claims may also be available if a licensee has been using the patented technology without a license.

U.S. federal courts have developed a body of FRAND case law that grapples with these layered claims. In Microsoft Corp. v. Motorola, Inc., 795 F.3d 1024 (9th Cir. 2015), the court affirmed a district court’s determination of a FRAND royalty rate for 802.11 and H.264 standard-essential patents, using a modified Georgia-Pacific analysis adapted for the FRAND context. The court rejected Motorola’s proposed royalty rates of approximately $4 billion per year as inconsistent with FRAND obligations and instead approved rates of approximately $1.8 million per year.

Calculating FRAND Royalty Rates: The Legal Standards

The absence of a universal formula for calculating FRAND royalty rates has generated substantial litigation. Courts and arbitral tribunals have developed several analytical frameworks:

• Top-down approach — Determines the appropriate aggregate royalty burden for all SEPs in a standard, then allocates a proportionate share to the patent holder based on the ratio of its essential patents to the total SEP portfolio. This approach prevents royalty stacking—the problem that arises when each SEP holder independently demands the maximum royalty without regard to the cumulative burden on licensees
• Comparable license approach — Analyzes prior licenses granted by the SEP holder or other SEP holders for comparable technologies to establish a market-based rate. This approach is favored when a robust market exists for comparable licenses but is complicated when prior licenses were entered under the threat of injunctive relief rather than at arm’s length
• Modified Georgia-Pacific analysis — Adapts the traditional 15-factor patent damages framework from Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970), to account for the FRAND commitment by downweighting factors that would support above-FRAND rates

Hold-Up and the Antitrust Dimension of FRAND

One of the central concerns driving FRAND policy is the risk of ‘patent hold-up’—the practice by which a SEP holder delays disclosure of its patents until a standard is widely adopted and switching costs are high, then demands supra-competitive royalties that implementers have no practical choice but to pay. The antitrust dimension of this concern is significant: depending on the circumstances, a SEP holder that breaches its FRAND commitment may violate Section 2 of the Sherman Act, 15 U.S.C. § 2, by attempting to monopolize the market for technology implementing the standard.

The FTC has pursued antitrust cases against SEP holders for failing to honor FRAND commitments. In In the Matter of Motorola Mobility LLC and Google Inc., FTC File No. 121-0120 (2013), the FTC entered a consent decree requiring Google (which had acquired Motorola’s SEP portfolio) to offer FRAND licenses and to refrain from seeking injunctive relief against willing licensees. This case established important precedent that using SEPs to obtain injunctions against willing licensees who dispute only the rate of a FRAND license may constitute anticompetitive conduct.

International Dimensions: FRAND Disputes Across Jurisdictions

FRAND disputes have become increasingly international, with parties often litigating simultaneously in multiple jurisdictions. U.S. courts, UK courts, German courts, and Chinese courts have all issued FRAND rate determinations for the same or overlapping SEP portfolios, sometimes with conflicting results. In 2020, the UK Supreme Court issued a landmark ruling in Unwired Planet International Ltd v. Huawei Technologies Co. Ltd [2020] UKSC 37, holding that UK courts have jurisdiction to determine a global FRAND rate and that an implementer who refuses the resulting rate can be enjoined from selling products in the UK even if the underlying SEPs are in other countries.

For U.S.-based businesses that manufacture or sell products implementing wireless communications standards, cellular standards, or multimedia standards, FRAND exposure extends beyond the domestic market. A comprehensive licensing strategy must account for the SEP portfolios of major holders—Qualcomm, InterDigital, Nokia, Ericsson, and others—and may require simultaneous negotiations and potentially simultaneous litigation across multiple jurisdictions.

Working With Patent Licensing Counsel on FRAND Matters

Whether you are a patent holder seeking to maximize licensing revenue consistent with your FRAND obligations, or an implementer seeking to challenge an excessive FRAND demand, the legal and technical complexity of standard-essential patent licensing requires experienced patent counsel. Revision Legal’s patent attorneys and internet law team have the background to advise on SEP licensing strategy, FRAND rate negotiations, and the litigation that arises when negotiations break down. Contact us today.