Fair, reasonable and non-discriminatory (FRAND) terms: A challenge for competition authorities

Journal of Competition Law and Economics

Volumn 7, Issue 3, 2011, Pages 523-541

  Mariniello, Mario ^a  

^a EUROPEAN COMMISSION   (Belgium)

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EID: 80052759009     PISSN: 17446414     EISSN: 17446422     Source Type: Journal    
DOI: 10.1093/joclec/nhr010     Document Type: Article

References (32)

1. Particularly relevant are the Rambus and the Qualcomm cases. In the Rambus case, following a complaint set forth by a number of DRAM manufacturers, the European Commission accused Rambus of infringing competition rules by deceptively lying or withholding information about its patents in the context of the JEDEC standard setting process. In December 2009, the European Commission accepted Rambus' proposed commitments, which were considered adequate to address its competition concerns.
2. See Commission Decision of 9.12.2009 (Case COMP/38.636 Rambus), http://ec.europa.eu/competition/antitrust/cases/dec_docs/38636/38636_1203_1.pdf.
3. In the Qualcomm case, the European Commission investigated the claims of a number of mobile phone producers (Nokia, Sony/Ericsson, NEC, Panasonic, Broadcom and Texas Instruments) accusing the research company Qualcomm of charging excessive, non-FRAND royalty rates to access its essential IP rights in W-CDMA, the technology selected as 3G standard in Europe. After 4 years of investigation, the complaints were withdrawn and the case was closed.
4. See Press Release, Eur. Comm'n, European Commission's Announcement to Close Formal Proceedings Against Qualcomm (Case COMP/39.247), http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/09/516.
5. The proposed approach thus implies an "ex-post" analysis, where the incremental value is defined as the difference between the value of the technologies that are competing to enter the standard.
6. See, e.g., Commonwealth Scientific Indus. Research Org. v. Buffalo Tech. (USA), Inc., No. 2:05-CV-53, 2006 WL 1233122 (E.D. Tex. May 8, 2006); Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297 (3d Cir 2007).
7. One could also argue that, theoretically, ex-post royalty rates that are lower than ex-ante rates do not necessarily imply that a FRAND violation did not occur. This would happen, for example, if the ex-post value of an IP right turns out to be lower than what was expected ex-ante. In this article, I take the view that a competition authority should normally consider ex-post rates lower than ex-ante rates not to violate FRAND (condition 3 of the "check list," as explained below). However, a competition authority may take into account such possibility when the evidence collected during the investigation suggests unequivocally that the reason for ex-ante rates higher than ex-post is to be attributed to the deceptive behavior of the patent holder, which intentionally induced a licensee to revise its ex-ante expectations upwards without a legitimate justification.
8. Cecilio V. Madero & Nicholas Banasevic, Standards and Market Power, 5 ANTITRUST CHRON. 1 (2008), https://www.competitionpolicyinternational.com/file/view/5330.
9. Anne Layne-Farrar and A. Jorge Padilla explore empirically the relationship between patent value (measured as number of forward citations) and inclusion in a standard. They find that inclusion in a standard need not have any affect at all on patent value; this is especially true for more valuable patents, for which the incremental effect on value due to inclusion in the standard is arguably lower.
10. See Anne Layne-Farrar, A. Jorge Padilla, Assessing the Link Between Standard Setting and Patent Holder Market Power, 9 INT'l J. IT STANDARDS AND STANDARDIZATION RES. (forthcoming 2011).
11. It should be noted that the proposed methodology focuses on the "fair and reasonable" part of FRAND-the non-discriminatory part is not discussed.
12. Daniel G. Swanson & William J. Baumol, Reasonable and Nondiscriminatory (RAND) Royalties, Standards Selection, and Control of Market Power, 73 ANTITRUST L.J. 1, 51-56 (2005).
13. In the United States, the equivalent concept to FRAND is RAND (the "fairness" element is absent).
14. Auction design has been widely explored in the literature. For an overview, see THE ECONOMIC THEORY OF AUCTIONS (Paul Klemperer ed., Edward Elgar 2000).
15. The model of Swanson and Baumol features a number of additional simplifications (in particular, that each competing technology has only one patent held by one company), which further question the general validity of its results. For an analysis, see Damien Gerardin, Anne Layne-Farrar & A. Jorge Padilla, Competing Away Market Power? An Economic Assessment of Ex Ante Auctions in Standard Setting, 4 EUR. COMPETITION J. 443 (2008).
16. Anne Layne-Farrar, A. Jorge Padilla & Richard Schmalensee, Pricing Patents for Licensing in Standard Setting Organizations: Making Sense of FRAND Commitments, 74 ANTITRUST L.J. 671 (2007).
17. Joseph Farrell, John Hayes, Carl Shapiro & Theresa Sullivan, Standard Setting, Patents and Hold-Up, 74 ANTITRUST L.J. 603, 637 (2007).
18. Roy J. Epstein &Alan J. Marcus, Economic Analysis of the Reasonable Royalty: Simplification and Extension of the Georgia-Pacific Factors, 85 J. PAT. & TRADEMARK OFF. SOC'Y 555 (2003).
19. Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970).
20. Philippe Chappatte, FRAND Commitments-The Case for Antitrust Intervention, 5 EUR. COMPETITION J. 319 (2009).
21. U.S. DEP'T OF JUSTICE & FED. TRADE COMM'N, ANTITRUST ENFORCEMENT AND INTELLECTUAL PROPERTY RIGHTS: PROMOTING INNOVATION AND COMPETITION (2007), available at http://www.justice.gov/atr/public/hearings/ip/222655.pdf.
22. Guidelines on the Applicability of Article 101 of the Treaty on the Functioning of the European Union to Horizontal Co-Operation Agreements, 2011 O.J. (C 11) 1. Note that there is no contradiction between paragraph 299 of the Guidelines and what was stated in the introduction as regards potential inefficiencies due to ex-ante disclosure of maximum royalty rates. Indeed, such disclosure can be inefficient only if the patent holder is obliged to disclose its maximum terms ex-ante. On the other hand, to prevent other types of inefficiencies, a patent holder must be able to unilaterally disclose its maximum terms ex-ante, if it wishes to do so, without infringing the European Treaty.
23. This approach comports well with the "hypothetical negotiation" for reasonable royalty determination defined in the U.S. case Georgia-Pacific, 318 F. Supp. 1116.
24. Empirical research shows that certain relationships exist. For example, lump sum/upfront payments vary inversely with running royalty rates, and increased restrictions (scope or geography) lower running royalty rates.
25. For an empirical analysis of the contract terms of licencing agreements, see Inés Macho-Stadler, Xavier Martinez-Giralt & J. David Pérez-Castrillo, The Role of Information in Licensing Contract Design, 25 RESEARCH POL'Y 43, 47-48 (1996).
26. This can also not be the case-a licensee may well conclude an agreement ex-ante and an agreement ex-post (for example, if the ex-ante agreement has limited time duration).
27. In the context of IP rights, competition authorities usually identify as many markets as the number of patents essential to the implementation of a certain technology. An essential patent is defined as a patent which cannot be circumvented by licensees in order to implement a certain technology-that is, the patent holder is an "unavoidable partner." In this article, it is assumed that the patent holder that is alleged to violate FRAND owns at least one essential patent to the technology selected as standard.
28. In that sense, condition 4 may overlap with condition 1.
29. This phenomenon is known in the literature as "raising rivals' costs." See, e.g., Steven C. Salop & David T. Scheffman, Raising Rivals' Costs, 73 AM. ECON.REV. 267 (1983).
30. For a theoretical model, see Klaus M. Schmidt, Complementary Patents and Market Structure (Centre for Econ. Policy Research, Discussion Paper No. DP7005, 2008).
31. As specified above, if a condition cannot be tested for objective lack of evidence, it should be assumed that the condition is satisfied.
32. F. Supp. 1116 (S.D.N.Y. 1970).