Author: Dennis W. Carlton & Allan L. Shampine
Published: April 24, 2013
Publication: Journal of Competition Law & Economics
This article acknowledges that hold-up can lead to inefficient standard setting and defines FRAND through the application of economic principles. It explains that “[t]he reduction in alternatives that results from the adoption of the standard can raise the maximum royalty rate that the patent holder demands (ex post) above the ex ante incremental value created by use of the patented technology,” and thus creates opportunities for hold-up. The reasonable royalty for FRAND purposes, the article argues, is equal to “the royalty that would have been negotiated ex ante, before the patented technology at issue had been adopted into the standard and prior to the licensee incurring sunk costs. The maximum royalty ex ante is based on the incremental value that the technology brings to the licensee compared to the next best alternative available.” The article also discusses the interpretation of non-discrimination in the context of FRAND. It argues that the non-discrimination principle means that “similarly situated” licensees should pay the same royalty rate, and that licensees are similarly situated “if ex ante they expect to obtain the same incremental value from the patented technology compared to the next best alternative available to be incorporated into the standard.”
One of the authors (Professor Carlton) has served as the Chief Economist in the U.S. Justice Department’s Antitrust Division.