An Economic Interpretation of FRAND

Dennis W. Carlton, University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER), and Allan Shampine, Compass Lexecon

8/26/2015
(Original Publish Date: 4/24/2013)

Standard setting organizations have for many years required members to commit to license patents essential to use of standards on Fair, Reasonable and Non-discriminatory terms. Unfortunately, SSOs have not defined what FRAND means, leaving its interpretation to courts and regulators. This paper explains the economic concerns underlying FRAND - hold-up and strategic behavior leading to inefficient behavior in a standard setting context - and how a proper economic interpretation of FRAND can eliminate or mitigate those concerns. Ex ante analyses based on the “reasonable” principle can potentially eliminate hold-up, but, as a practical matter, may be costly, difficult to perform and error-prone. In such circumstances, the “non-discriminatory” principle of FRAND can provide some protection against hold-up even when the “reasonable” principle of FRAND does not.