Patent Licensing
FRAND Royalty
Fair, reasonable, and non-discriminatory licensing is the currency of standards policy. Courts have spent decades deciding what "fair" actually means — and the tension between hold-up and hold-out drives most of the litigation.
What is a FRAND commitment and when does it apply?
A FRAND (fair, reasonable, and non-discriminatory) commitment is a contractual obligation that patent holders make when declaring patents essential to a technical standard.
Origin. When companies participate in standard-setting organizations (SSOs) like IEEE (Wi-Fi), 3GPP (LTE/5G), ETSI (GSM, 4G), JEDEC (memory), or ISO/IEC, they often contribute patented technology to the standard
Sso Policies. To prevent patent hold-up after the standard is adopted and implementers are locked in, SSOs require members to disclose potentially essential patents and commit to license on FRAND terms
The Disclosure Obligation. If a member's patents may be essential to implementing the standard, the member must disclose them so the SSO can consider alternatives or require a FRAND commitment
FRAND Commitment
- The patent holder commits to license the declared standard-essential patents (SEPs) on terms that are: (a) FAIR: generally a market-rate royalty reflecting the patent's contribution to the standard
- (b) REASONABLE: not exploitative of the lock-in that standard adoption creates
- (c) NON-DISCRIMINATORY: similarly situated licensees get similar terms
Who is Bound
- The FRAND commitment runs with the patent — if the SEP is sold to a patent assertion entity, the FRAND obligation transfers
- The new owner must honor the commitment
Royalty-free Option
- Some SSOs (particularly IEEE post-2015) also allow royalty-free (RF) licensing commitments
- RF removes the licensing dispute entirely but reduces patent monetization incentives
What FRAND Does not Require
- FRAND does not specify a particular rate
- It defines a floor and ceiling by context
- The parties must negotiate (or litigate) the specific rate
Consequences of Refusal
- If an SEP holder refuses to license on FRAND terms after committing, they may: (a) lose the right to injunctive relief (eBay analysis + FRAND breach)
- (b) face antitrust liability
- (c) be required by courts to license at a court-determined FRAND rate.
How do courts determine what constitutes a FRAND royalty rate?
FRAND rate determination is one of the most contested areas in patent law — courts have developed several methodologies.
Methodology 1 — Comparable Licenses
- The most widely used approach
- Find real licenses for the same or comparable SEPs
- Adjust for differences in timing, scope, geography, and essentiality
- ERICSSON v. D-LINK (Fed. Cir. 2014): 'comparable licenses' are the most probative evidence of FRAND rates
- The court emphasized that licenses to the same patents under similar terms are the starting point
Comparability Requirements
- Licenses must involve patents of similar technical value
- Cannot use licenses made under threat of litigation or before the FRAND commitment was made
Methodology 2 — Top-down Analysis
- Start with the royalty-bearing value of the end product (or the smallest salable patent-practicing unit)
- Determine the total reasonable royalty for all SEPs in the relevant standard
- Allocate a proportionate share to the specific patentee's SEPs based on their share of essential claims
- TCL COMMUNICATION v. ERICSSON (C.D. Cal. 2018): Judge Selna applied a modified top-down approach
Methodology 3 — Modified Georgia-pacific
- Standard Georgia-Pacific factors adjusted for the FRAND context
- Critical adjustment: the hypothetical negotiation must occur BEFORE standard adoption (to avoid hold-up) even though the negotiation is being reconstructed after the fact
- Ericsson v. D-Link: the hypothetical negotiation should be 'purified' of the hold-up value that results from standard adoption
Smallest Salable Patent-practicing Unit (SSPPU). Some courts require apportionment to the SSPPU (e.g., the modem chip that implements the standard) rather than the end device price
Royalty Stacking Consideration
- The cumulative royalty from all SEP holders in the standard is relevant
- A rate that would be reasonable in isolation may be unreasonable if the total stack is prohibitive.
What does the non-discrimination requirement in FRAND mean?
The non-discrimination (ND) prong of FRAND requires that the SEP holder offer comparable terms to similarly situated licensees: ABSOLUTE vs..
Relative Non-discrimination
Absolute. Every licensee gets the same rate regardless of their competitive position or market power
Relative
- Similarly situated licensees get comparable terms
- Most modern SSO policies use relative non-discrimination
What 'Similarly Situated' Means
- Factors considered include: size of licensee
- Volume of licensed products
- Geographic scope of license
- Whether cross-license offsets are involved
- Whether the licensee is a direct competitor of the SEP holder
- TCL v. ERICSSON (Fed. Cir. 2020): the court examined whether Ericsson's licensing offers to different smartphone manufacturers were comparably non-discriminatory
Discrimination in Patent Pool Context
- Pool royalty rates are offered on identical terms to all licensees — this is a natural implementation of ND
- Individual licensing must be checked against pool rates and other known licenses
Most-favored Licensee Clauses. Some SEP licenses include MFL provisions — if the SEP holder grants a lower rate to another licensee, the original licensee gets the lower rate retroactively
Discriminatory Licensing Patterns
- Offering lower rates to joint-venture partners or affiliated companies than to independent competitors
- Refusing to license at any rate vs. offering licenses to competitors at disadvantageous terms
International Variation
- ETSI's FRAND policy (Article 6.1) requires members to grant irrevocable licenses on fair, reasonable, and non-discriminatory terms
- IEEE's 2015 patent policy reform changed the royalty base definition (smallest salable patent-practicing unit) and limited injunctions for SEPs
- Different SSOs have different ND interpretations
Injunctions and Non-discrimination. Courts are reluctant to grant injunctions for FRAND-committed SEPs because injunctions give the SEP holder hold-up leverage inconsistent with the FRAND commitment.
What are the major FRAND disputes and what did courts decide?
Several major FRAND litigations have shaped how courts handle SEP disputes: ERICSSON v. D-LINK SYSTEMS (Fed. Cir. 2014): overturned district court FRAND jury instructions that used unadjusted Georgia-Pacific factors; held that FRAND-committed SEPs require special jury instructions recognizing: the ex ante nature of the hypothetical negotiation (before standard adoption); the need to avoid capturing hold-up value; the relevance of royalty stacking; established that comparable licenses are the most probative evidence; MICROSOFT v. MOTOROLA (W.D. Wash. 2013): Judge Robart determined FRAND rates for Motorola's 802.11 and H.264 SEPs; Motorola demanded 2.25% of end product price; court set rate at $0.555–$1.84 per unit — far below Motorola's demand; method: comparable licenses + apportionment; HUAWEI v..
Zte (Cjeu 2015)
- EU Court of Justice addressed FRAND in antitrust context
- If SEP holder refuses to negotiate in good faith, SEP holder may have abused dominant position (TFEU Article 102)
- CJEU required SEP holders to: make written FRAND offer before seeking injunction
- Set a specific royalty rate
- Licensee must respond diligently
- TCL COMMUNICATION v. ERICSSON (C.D. Cal. 2018 / Fed. Cir. 2020): Judge Selna set FRAND royalty for Ericsson's 4G LTE SEPs
- Used top-down approach
- Fed. Cir. reversed on procedural grounds but confirmed the top-down methodology is valid
- APPLE v. QUALCOMM (S.D. Cal. settled 2019): $4.5B settlement after Apple challenged Qualcomm's no-license-no-chips policy as FRAND violation
- Terms undisclosed but Qualcomm resumed chip supply
- CONTINENTAL AUTOMOTIVE v. AVANCI (N.D. Tex.): automotive industry challenging whether FRAND applies to component manufacturers (Tier 1 suppliers) or only to end-product manufacturers (OEMs).
What are hold-up and hold-out, and how do they affect FRAND negotiations?
FRAND policy attempts to balance two opposing risks in SEP licensing — hold-up by SEP holders and hold-out by implementers.
Hold-up. Occurs when the SEP holder demands royalties far exceeding the ex ante value of the patented technology (the value the technology would have had before becoming standard-essential)
Mechanism
- Once a standard is adopted and implementers have built products around it (investing in design-in, manufacturing, distribution), switching to an alternative is extremely costly
- The SEP holder can exploit this lock-in to demand higher royalties than the technology would have commanded in a competitive market
- FRAND's RESPONSE TO HOLD-UP: FRAND commits the SEP holder to the ex ante value
- The hypothetical negotiation in FRAND rate-setting is conducted as if it occurred before the standard was adopted
- Courts adjust royalty bases (SSPPU vs. end product) to avoid capturing hold-up value
Hold-out. The mirror problem — implementers use the threat of protracted litigation to delay licensing and obtain below-FRAND rates
Mechanism
- SEP holders cannot easily obtain injunctions for FRAND-committed patents (eBay analysis + FRAND waiver of injunction right)
- This reduces the SEP holder's leverage
- Implementers 'hold out' by litigating in hope the SEP holder settles at below-FRAND rates to avoid the litigation burden
Mechanism for Hold-out
- Implementer refuses to negotiate in good faith
- Uses litigation to delay
- Counts on SEP holder's desire for a settlement over extended PTAB and district court proceedings
Balancing
- Huawei v. ZTE (CJEU 2015) addresses hold-out by requiring implementers to respond promptly and in good faith to FRAND offers or lose the FRAND defense
- US courts have not fully adopted a comparable framework
Policy Tension. Courts disagree on which risk (hold-up or hold-out) is greater and how to address it — this drives much of the ongoing FRAND litigation.
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