The Battle to Define the Meaning of FRAND

Doctoral thesis, 2017

This thesis explores the battle among actors in the telecommunication value chain to define the meaning of FRAND (Fair, Reasonable, and Non-Discriminatory), which forms the basis for the IPR policy and standard-essential patent (SEP) licensing agreements in most standard-setting organizations (SSOs). As a secondary goal, this thesis seeks to improve the theoretical understanding of the changing nature of value creation from an industrial to a knowledge-based economic paradigm, particularly in relation to the changing role of patents to facilitate openness and regulate access. An investigation of the theoretical concepts that define FRAND and SEP value as well as an empirical investigation of the industrial dynamics and the interpretation of FRAND in the US judicial system is conducted. This includes an in-depth, single case study of the landmark Microsoft case as well as a comparative analysis across the four initial SEP/FRAND cases in US district court. Additionally, a comparative analysis of legal and market norms is conducted through case studies and doctrinal legal analysis from the theoretical perspective of the intellectual value chain. Finally, the concepts of patent holdup and holdout are analyzed in relation to mainstream economic theory, and patent holdout is further investigated through market data as well as interviews and a survey with industry experts. The results show that while FRAND-enabled standards have experienced historical market success, an expansion of the division of labor in the telecommunication value chain has created a profound divergence among market actors regarding the value of SEPs, often exceeding more than an order of magnitude. Concomitantly, the US courts have also produced diverse rulings in their attempt to value SEPs and set FRAND royalties with considerable implications on economic performance and efficiency. Additionally, several valuation principles are introduced regarding the determination of royalty base in patent damages that illustrate the importance of linking legal norms to the market norms of the standard in question. Furthermore, patent holdout is found to be a substantial phenomenon with specific strategies that differ in relation to actors in developed and emerging markets. Lastly, the concepts of holdup and holdout are shown to be used much differently in the current patent debate in comparison to mainstream economic theory leading to the proposal of a new, non-pejorative framework based on a spectrum of asymmetric bargaining power positions ranging from circumstantial to systematic to systemic.