Can Standard-Setting Lead to Exploitative Abuse? A Dissonant View on Patent Hold-Up, Royalty Stacking and the Meaning of FRAND

Damien Geradin, Professor at the Tilburg Law and Economics Center and Partner at Howrey LLP, and Miguel Rato, Associate at Howrey LLP

12/28/2007
(Original Publish Date: 2006)

Standard-setting activities, which aim to achieve device interoperability and product compatibility, play a fundamental role in fostering innovation and competition in a variety of markets. Such activities, typically carried out by armies of engineers, would generally not be expected to fascinate lawyers and economists. But they do - and they have recently received much attention as a result of high-profile cases, complaints lodged with competition authorities, and attempts by members of Standard-Setting Organizations (“SSOs”) to have their rules and procedures modified to prevent allegedly anti-competitive outcomes. There seems to be a growing perception, largely fed by certain interest groups, that current standard-setting procedures generally based on the so-called FRAND licensing regime unduly allow opportunistic holders of Intellectual Property (“IP”) embedded in a standard to extract excessive royalties from their licensees. Against this background, the objective of this paper is to demonstrate that the existing FRAND regime works. Ongoing proposals to alter it by tilting the bargaining position of licensors, in particular that of pure innovators, in favour of licensees are not only unnecessary, being based on false premises, but would also prove detrimental to investment and innovation. Fortunately, these attempts, and in particularly those to amend the rules and procedures of SSOs', have so far been unsuccessful. They remain nevertheless a constant threat.