The Economics of FRAND

Since the issue first emerged in the policy arena in the early 2000s, economists have been debating the meaning and implications of FRAND licensing commitments within cooperative technology standard setting organizations (SSOs). Today the issue is global, with scholars and policymakers in Europe, Korea, Japan, China, Taiwan, India, and Brazil all weighing in. Most SSOs around the world ask their members to commit to offer any patents that might be needed to implement a standard in commercial products and services (that is, any patents that might be “essential” for the practice of the standard) on Fair, Reasonable and Non-Discriminatory (FRAND) terms. But what exactly does it mean to license a patent on fair, reasonable, and non-discriminatory terms and conditions? Does promising to do so come with other, implicit, obligations as well, such as foregoing seeking an injunction which is otherwise an option for patent holders? And more fundamentally, why do SSOs ask their patent-contributing members to commit to FRAND? In this chapter, I review the academic literature on FRAND licensing. My review is intended to discuss the economic underpinnings of FRAND, but it would be incomplete without discussing court rulings to date, as FRAND court decisions provide real world boundaries to interpretations of FRAND licensing. That being said, my summary of the court cases focuses on the economic interpretation of FRAND and the practical implications for expert analysis, and does not cover any legal assessment (for which I am unqualified). While the underlying economics of FRAND are universal, legal and institutional factors affect court outcomes and policy interests; I therefore restrict my discussion to the US