Author: Janusz Ordover and Allan Shampine
Published: October 11, 2014
Publication: The Antitrust Source
This article discusses how FRAND commitments should be enforced to achieve their economic goals and avoid anti-competitive effects. It first discusses who should be able to obtain a license to FRAND-encumbered SEPs. The article concludes that any willing licensee should be able to get a license and that SEP holders “should not be able to restrict licensing based on a firm’s location in the supply chain.” The authors note that, “if a patent holder offers licenses to only downstream firms and refuses to license upstream firms, it presumably expects this strategy to be more profitable than licensing upstream or not offering a license.” This strategy “gives rise to a serious concern that the patent holder may be attempting, by exercising hold-up, to extract part of the downstream firms’ profits from functionality unrelated to the patent holder’s patented technology.” The article also supports use of the ex ante framework to calculate reasonable royalties, which bases the SEP holder’s compensation on the incremental value of the patented technology relative to the alternatives available prior to the standard being set.” Finally, the article discusses the royalty base against which a royalty should be calculated. It supports setting royalties at the component level for patents that read on components. The article argues that “[i]mposing royalties at the component level is attractive both for its relative simplicity and because it still rewards the innovator with increased revenues in the event of growth of the volume of sales or if the price of the component increases.” Using the component as the royalty base also means that license terms can be independent of the end use to which a component is put, which is consistent with the non-discrimination prong of FRAND.