Pricing Patents for Licensing in Standard Setting Organizations: Making Sense of FRAND Commitments

Anne Layne-Farrar, CEMFI Casado del Alisal 5; 28014 Madrid, Jorge Padilla, CEMFI Casado del Alisal 5; 28014 Madrid, and Richard Schmalensee, CEMFI Casado del Alisal 5; 28014 Madrid

7/25/2008
(Original Publish Date: 1/10/2007)

We explore potential methods for assessing whether licensing terms for intellectual property declared essential within a standard setting organization can be considered fair, reasonable, and non-discriminatory (FRAND). We first consider extending Georgia-Pacific to a standard setting context. We then evaluate numeric proportionality, which is modelled after certain patent pool arrangements and which has been proposed in a pending FRAND antitrust suit. We then turn to two economic models with potential. The first—the efficient component-pricing rule (ECPR)—is based on the economic concept of market competition. The second—-the Shapley value method—is based on cooperative game theory models and social concepts for a fair division of rents. Interestingly, these two distinct methods suggest a similar benchmark for evaluating FRAND licenses, but ones which might appeal differently to the courts and competition authorities in the US as compared to Europe. We find that under any approach, patents covering “essential” technologies with a greater contribution to the value of the standard and without close substitutes before the standard gets adopted should receive higher royalty payments after the adoption of the standard.