A little over a month ago, Judge James L. Robart of the United States District Court for the Western District of Washington published his 207-page FRAND rate-setting decision in Microsoft v. Motorola.

FRAND, which standards for “fair, reasonable, and non-discriminatory” is a term that comes up in the context of standardization.  Standardization, especially in the context of technology, is crucial in today’s economy.  Technology standards allow for products made by different manufacturers to work together.

Standards-setting organizations (SSOs) are comprised of industry members who all agree to follow adopted standards for the industry’s collective benefit.  A problem can arise, however, when a member’s patented technology becomes incorporated into the standard.  Such patents are referred to as standard-essential patents (SEPs).  Because all of its competitors must use its patented technology to be in compliance with the standard, the patentee can engage in patent “hold-up” and demand excessive royalties or lopsided licensing arrangements.

SSOs combat this problem by requiring all members to commit to license on FRAND terms any patent that is incorporated into a standard.  This commitment aims at preventing the SEP holder from demanding unfair, unreasonable, or discriminatory licenses from users of the standard.

Up until Judge Robart’s landmark decision, very little guidance was available regarding what a FRAND commitment actually entailed.  Neither the SSOs nor the courts had provided much definition to the potentially ambiguous terms.  Robart’s decision is the flagship rate-setting decision.

As a basic principle, Robart adopts a “hypothetical bilateral negotiation approach” based on the “consistently sanctioned” Georgia-Pacific framework for reasonable royalties in patent infringement cases.  However, he points out that the FRAND commitment should “limit a patent holder to a reasonable royalty on the economic value of its patented technology itself, apart from the value associated with incorporation of the patented technology into the standard.”

In light of the nature of the FRAND obligation, Robart held that the Georgia-Pacific factors must be modified and gave two reasons why the traditional Georgia-Pacific analysis is different than a hypothetical FRAND negotiation.  First, where patent holders outside the FRAND context may choose to withhold licensing, the SEP owner is under an obligation to license the patent on FRAND terms.  Second, the FRAND negotiation will not take place in a vacuum.  Since any given standard may be comprised of numerous patents, any FRAND negotiation must consider the problem of “royalty-stacking,” which acknowledges the fact that any user of the standard will likely have to acquire licenses from many different SEP holders in order to be in compliance with the standard.  As such, the hypothetical FRAND negotiation must consider the other SEPs for that particular standard and how important the SEP in question is to the standard.  With these two principles in mind, Judge Robart reanalyzes the Georgia-Pacific factors.  A summary of his modifications can be found here.

Although Judge Robart largely agreed with Motorola’s proposed approach (the hypothetical bilateral negotiation), he incorporated Microsoft’s request to use patent pool rates as an indicator of the range of royalties consistent with the FRAND commitment.  Recognizing that as a general matter, patent pools tend to produce lower rates than those that could be achieved through bilateral negotiations, he admitted that a pool rate itself does not constitute a FRAND royalty rate for an SEP holder who is not a member of the pool.  However, he found that “under certain circumstances, patent pools can serve as indicators of a royalty rate that falls within the range of royalties consistent with the RAND commitment.

In the end, the resulting FRAND rate was only about $560,000 per year–about Microsoft’s proposal.  For Motorola, however, it fell roughly $4 billion short of its initial demand.  Even more troublesome for Motorola is that the case is set to go to trial to determine whether Motorola’s initial offer violated its FRAND obligations.  Motorola made a promise to offer FRAND licenses, and a court has just said that their offer was $4 billion more than FRAND.  This may lead a jury to find that Motorola breached its FRAND commitment.

At this point, Motorola is probably wishing they could all just be FRANDs.

–Michael Joshi

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3 Responses to Why Can’t We Be FRANDs? The Microsoft v. Motorola Decision

  1. Shannon Han says:

    There is a very interesting tension between the need for standardization to encourage innovation and the anti-competitive effects of adopting such agreements. Allowing government agencies like the FTC to step in and regulate the anti-competitive tendencies may provide a reasonable solution to the issue. Whether they have the authority to enforce FRAND agreements may not yet be settled but having a consistent party that is committed to enforcement may be more beneficial than relying on individual contracting parties or the interpretation of FRAND by the various SSO’s.

  2. Mike says:

    The problem is that the basis for these agreements are bylaws of the standards-setting organizations (SSOs). The actual FRAND licenses are not getting drawn up because the parties can’t agree on what FRAND means. That said, I think you’re on the right track. One simple solution would be to have the SSOs be more involved in the enforcement of these agreements (perhaps in the form of your idea of a penalty for failing to offer or accept FRAND terms). Unfortunately, SSOs have done nothing more than require parties to promise to reach FRAND agreements. Beyond that, SSOs haven’t provided guidance as to what those promises mean or played any role in making sure parties honor their promises. Instead, the FRAND promise has been addressed in the courts as a contractual obligation. It’s possible that this route is enough, given that Motorola might get hammered for breaching its promise by requesting a FRAND rate that was $4 billion off what Judge Robart held to be the FRAND rate. If so, that’ll set a pretty good example.

  3. Bradlee Edmondson says:

    I wonder if the transactional folks drawing up these agreements can specify that the royalties start out FRAND, but fall to zero when obviously non-FRAND terms are demanded, as in Motorola’s opening gambit in this action? It’s not punitive, it’s “conditional”…