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FRAND: A Way to Balance Rights of Patent Holders and Manufacturers

In highly competitive industries where technology development, interoperability, and standards play an outsized role — information technology, pharmaceutical, biotechnology — there needs to be a way for everyone to move forward, even if one company has a legal lock on a technology critical to any minimum viable product in the sector. That’s where FRAND comes in. The acronym is cobbled together from the phrase “fair, reasonable, and non-discriminatory.” If you squint, you can see it. And FRAND is the mechanism by which companies that control these critical technologies license them to manufacturers wishing to build to a standard. You see, a patent holder is required to license only if the patent is deemed essential to meeting a standard. In that case, an agreement to abide by FRAND is signed by all members of that standards body.

Dissecting FRAND into its constituent parts is revealing. “Fair” relates to licensing terms, such as how long an agreement runs for, what technology is included, how usage will be calculated, and how the IP will be conveyed. “Reasonable” refers to rates; that is, how much a licensee will pay a licensor for access to its technology. Under “non-discriminatory,” the licensor must be willing to grant access to all comers, anyone with the minimum credentials to transact in the space, and all customers in a class must be treated the same. Other than these broad outlines, FRAND is not prescriptive; that is, there are no detailed rules governing how FRAND agreements are to be carried out. This deliberate vagueness was designed to encourage negotiation. At its core, FRAND is all about commercial agreements, but there are few rules governing them. FRAND was set up to allow market forces to operate — which often leaves it to the courts to decide what’s fair and what’s not. In this situation, judicial precedent is often the only thing to go by.

Right now, FRAND is decidedly relevant in the mobile world. The standards body that sets policy for the worldwide telecommunications industry, the European Telecommunications Standards Institute (ETSI), is currently presiding over the transition to 5G, the latest mobile standard. Since multiple players rely on each other’s technology, FRAND licensing has been a core element of mobile development. FRAND covers a type of intellectual property (IP) known as standard-essential patents (SEPs), those patents essential for implementing a standard. Without access to SEPs, implementers can’t manufacturer their products. Without royalty payments for licenses to access SEPs, contributors can’t recoup R&D investments made to produce them and generate capital to create more.

Companies such as Ericsson, Huawei, Nokia, and Qualcomm, the largest contributors to the cellular IP pool, agreed to share their SEPs with implementers like Apple, LG, OnePlus, Oppo, Samsung, Vivo, and Xiaomi, which, in turn, agreed to pay fair licensing fees to the contributors in order to use the technology.

The FRAND system, which worked well for many years, has been faltering recently, though. Dating all the way back to 1790, Congress recognized explicitly the rights of creators and inventors in the intellectual property clause of the Constitution. That clause gave almost all of the power to patent holders. They were under no obligation to let anyone else use their patents for any purpose until they expired. Most holders exercised their own patents as manufacturers. When the International Telecommunications Union — which started sponsoring agreements for the telegraph industry in the 19th century — grew in importance after World War II, it fostered the first worldwide FRAND agreements so that nations around the world could share in the growth of the early telecommunications business, when most traffic was voice carried over physical wires. FRAND was meant to foster a balanced commitment wherein a patent holder agreed, if its patents were used in the standard, to trade its own exclusive use for a fair return from licensees. The IP of Motorola, one of the early telecom contributors, lives on in patents held by Google, which bought them to defend Android, Lenovo, which acquired the operating part of Motorola from Google, and a few other firms that purchased pieces of company along the way.

FRAND allowed implementers to license SEPs so they could manufacture legally. Over time, the ownership of SEPs shifted from primarily creators like Motorola to a mix of entities, some of which acquired patents either singly or in portfolios while others contributed new IP to the available pool.

But what’s really changed is that the implementers have grown in power. Not only are companies like Apple (with the highest market capitalization of any company in the world) swinging their economic weight around, but new implementers have entered the market. Joining the cell phone makers are, for example, the automobile companies, which will be putting advanced cellular connectivity in all their vehicles in a few short years.

These manufacturers view SEPs as nothing more than a cost of doing business, and their primary goal is to reduce costs and increase profits. And so they have engaged in various skirmishes to diminish the standing of the contributors and reduce the value of the SEPs they need.

You might say, well, isn’t that the way the market operates? Isn’t it doing what it’s supposed to do?

And the answer is no, not really. Because the contributors, many of whom invest as much as 20% of annual revenue in R&D, represent the font of future technologies, and if they are starved of capital to serve the short-term needs of the implementers, then the technology pipeline will dry up. And, yes, the contributors will be hurt first, but not long afterward, the implementers will begin to feel the pain, and, the final losers — because they will be denied the benefits of future products — will be consumers.

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