Economic Determinations in "Frand Rate"-Setting: A Guide for the Perplexed
FORDHAM INTERNATIONAL LAW JOURNAL
Fordham International Law Journal
Jonathan D. Putnam
Copyright c 2018 by the authors. Fordham International Law Journal is produced by The
Berkeley Electronic Press (bepress). https://ir.lawnet.fordham.edu/ilj
ECONOMIC DETERMINATIONS IN “FRAND RATE”-SETTING:
A GUIDE FOR THE PERPLEXED
Jonathan D. Putnam*
Owners of standard-essential patents commit to be prepared to
license their technology on “fair, reasonable and
nondiscriminatory” terms and conditions. When negotiations over such
terms break down, arbitrators and courts may be tasked with
determining them. Such determinations face unusual obstacles, such
as the frequent inapplicability of patent damages law to pricing large,
standardized patent portfolios. The absence of good legal guidance is
compounded by an economic narrative – the “standard FRAND
paradigm” – which systematically misstates the circumstances,
objectives and requirements of a proper FRAND determination,
systematically favoring implementers of the standard. I contrast this
static paradigm with the proper, economically consistent, dynamic
paradigm. I then explain why a “FRAND rate determination” is
usually difficult – starting with the threshold error of confining the
determination to a “FRAND rate.” I also identify related economic
errors that pervade both expert economic testimony and legal
* Principal at Competition Dynamics, Inc. This paper is based on a panel presentation
prepared for Facing the Future in the International Arbitration: Evolving Issues, Practices and
Solutions, Fordham Law School Conference on International Mediation and Arbitration,
November 17, 2017. I received helpful comments and suggestions from fellow panelists and
from Benno Kimmelman, whom I thank for the invitation to participate. I have consulted for
AT&T, Ericsson, Evolved Wireless, Google, InterDigital, Palm, Qualcomm, Time Warner
Cable, TQ Delta, and TriQuint in telecommunications-related matters. I do not speak for them,
for Competition Dynamics or for any of its past or future clients. All opinions are based on
information available to me as of February 2018; all errors are my own.
FORDHAM INTERNATIONAL LAW JOURNAL [Vol. 41:953
characterizations of the evidence in a typical proceeding. Because of
the non-discrimination requirement, the consequences of such errors
can persist indefinitely in later proceedings. In addition to
highlighting these errors for prospective fact-finders, I close with a
test for the legitimacy of a proposed FRAND determination.
2. Between-licensor Inconsistency ..................................1012
VI. CONCLUSION ........................................................................1014
When patent rights are transacted, most are priced in voluntary,
private agreements covering large patent portfolios. While the parties
to such transactions necessarily must agree on an aggregate price,
they need not, and generally do not, agree on fundamental
determinants of that price, such as how many units will be licensed, or
whether the licensed patent rights are actually used in the licensed
units, or indeed are valid at all. The terms, and often the existence, of
such portfolio-wide transactions are usually confidential.
When patent rights are exchanged involuntarily – through
infringement – individual patents are asserted in adversarial
proceedings, typically a patent infringement trial. If the patent holder
can prove that the asserted patents are valid and infringed, the patents
are then “priced” in the form of a compensatory damages award.
Being public, such trials and pricing of individual patent rights are
nearly the exclusive source of “patent damages law.”1
In short, the pricing of most patents occurs in large, uncertain,
voluntary, and private contracts, but the law that governs that pricing
evolves from individual, certain, adversarial, and public proceedings.
With the standardization of complex technologies comprising
hundreds of inventions, and the need for firms to exchange the rights
to large numbers of standard-essential patents (SEPs) on “fair,
reasonable and non-discriminatory” (FRAND) terms, demand has
grown for a heretofore unusual hybrid: the pricing of patents in large,
uncertain, adversarial, private contracts.2 Most commonly, the vehicle
for devising such contracts is commercial arbitration.3
In such arbitrations, arbitrators are tasked with determining
“fair” terms for a large, uncertain patent portfolio. But the damages
1. See e.g., JOHN SKENYON, CHRISTOPHER MARCHESE, & JOHN LAND, PATENT
DAMAGES LAW AND PRACTICE (2017).
2. See Mark A. Lemley & Carl Shapiro, A Simple Approach to Setting Reasonable
Royalties for Standard-Essential Patents, 28 BERKELEY TECH. L. J. 1135, 1135 (2013)
(arbitration of FRAND terms and conditions is only advisable).
law on which they may rely they rely upon is based on individual,
certain patents., the objective of that law being damages. In other
words, the goal here is offer damages that adequately compensate the
payee, as opposed to focusing on notions of fairness and equity,
“adequate to compensate” the patentee – not “fairness.”
In advocating their respective positions in such an arbitration,
the patent holder and the licensee generally proffer testimony from
economic experts, as they do in the damages phase of a patent
infringement trial. But economists, for whom the “compensation”
sought at trial is a familiar and well-defined standard, have no special
expertise in determining “fairness,” which is the arbitrator’s
objective.4 Given that it is hard for economists to price large numbers
of patents, pricing them “fairly” invites speculation and expands the
scope for error, not to mention mischief.
Unsurprisingly, the disconnections between the arbitrators’ task
and the applicable law, and between the desired and proffered expert
testimony, may lead to confused, uncertain, unreliable and
unjustifiable arbitration awards.
So far, so bad: hard cases make bad law, but at least in the
arbitration context they usually only make bad “private” law, because
arbitration awards are generally confidential and unreviewable.5
Unfortunately, bad arbitration awards do not remain hidden in
the FRAND context, because (under the “ND” portion of FRAND),
the patent holder undertakes not to discriminate among its licensees.
Thus, a bad arbitration award lives on, to be examined again and
again in subsequent arbitrations involving either of the parties, who
have obvious incentives to emphasize or minimize the significance of
the award in future proceedings. In such proceedings, future
arbitrators must weigh not only the competing claims before them,
4. Under the standard economic theory of “comparative statics,” economists compare an
agent’s economic welfare in two or more states of the world. When an agent experiences an
inferior state (for example, the agent has been harmed), but is entitled by law to a superior
state, the difference in welfare between the two states measures the agent’s compensation.
Normative “fairness” is not a consideration in determining such objective compensation. See,
e.g., HAL R. VARIAN, INTERMEDIATE MICROECONOMICS: A MODERN APPROACH 251-69
(Jack Repcheck ed., 8th ed. 2010).
5. See, e.g., Sharon E. Schulte, Good Policy or Judicial Abdication: When Courts
Uphold Arbitral Awards Which Are in Excess of the Arbitrator's Jurisdiction – Hall v.
Superior Court, 1994 J. DISP. RESOL. (1994) (discussing the general rule that an arbitrator’s
decision is, with limited exceptions, unreviewable on its merits).
but also how to square a “bad” prior decision with their own
obligation, on behalf of the parties appearing before them, not to
The possibility of inconsistent, and persistent, arbitration awards
with no prospect for “appellate” review and reconciliation suggests a
systemic failure, which ultimately requires a systemic solution. As
desirable as that might be, the present paper’s objectives are more
modest. I provide a “guide to the perplexed” for arbitrators who find
themselves in a FRAND proceeding. As an economist, I focus on the
economics of this determination, including the proper scope of
economic testimony, some of the errors that economic witnesses
commonly make, and how non-economists can identify and probe
such errors, to avoid their contamination of the final award. As I have
explained, the fact of such errors poses difficult legal problems for
arbitrators faced with inconsistent past results. Thus, I also suggest
ways in which future arbitrators can anticipate and attempt to
harmonize past inconsistencies. These suggestions in turn point the
way towards better systemic solutions, which will likely mean
changes in the law governing the pricing of standard-essential patents.
Naturally, those changes will ultimately be the province of lawyers,
The remainder of the paper is organized as follows. In Section II,
I briefly review standard-essential patents and the FRAND regime
that typically governs them. I also contrast the “standard FRAND
paradigm” with a robust and balanced restatement of the policy
objectives underlying the FRAND regime. In Section III I explain
why FRAND determinations are intrinsically difficult, given the
available data. In Section IV I also identify several common types of
errors in economic testimony. Section V explores some of the
spillover effects of such errors. Section VI concludes with some
II. STANDARD-ESSENTIAL PATENTS AND FRAND LICENSING A.
Standards and Standard-Setting Organizations
Traditionally, firms develop technology specific to their own
products. Often, there is more than one way to skin a cat, so
competing firms are able to create functional substitutes using their
own proprietary apparatus and methods. Sometimes, firms develop
technology that they license out to others, either to competitors or to
firms selling in other markets.
Again, traditionally, there is no reason for one company’s
product to inter-operate with another’s; no one expects to mount a
Chevrolet brake on a Ford. But in some industries – such as networks,
which require communications among devices – it is valuable to
consumers if their products interoperate.6 Interoperability means that
an Apple iPhone can communicate with a Samsung cellular base
station, even though Apple and Samsung compete in the handset
market.7 Were that not the case, handset manufacturers would have to
sell base stations as well, and consumers of each handset brand could
only communicate with others who had purchased the same brand.
The resulting proprietary networks are inefficiently small. With
interoperability, there is need only for a single network. Firms then
compete based on (differentiated) handset features, not on the
(common) communications interface.
Standard-setting organizations (“SSOs”) and standard
development organizations (“SDOs”) direct the development and
selection of inventions into technical standards.8 For those standards
in which the choice of technology is not arbitrary – the vast majority
– committees of technical experts select among proposed technical
contributions to pick the “best” overall combination. Unsurprisingly,
when firms propose recent technology to a technical committee, that
technology may be the subject of a patent or pending patent
application. There is therefore an intimate linkage between the
6. Standards also exist when it is necessary or efficient to ensure minimum quality
levels, or when other types of coordination increase public welfare or safety. Some standards,
such as driving on the right-hand side of the road, or “green light means go,” are mostly or
entirely arbitrary; others have desirable properties relative to alternatives.
7. National Communications System Technology & Standards Division,
Interoperability, in Telecommunications: Glossary of Telecommunication Terms I-15 (1996)
(defining “interoperability” as “[t]he condition achieved among communications-electronics
systems or items of communications-electronics equipment when information or services can
be exchanged directly and satisfactorily between them and/or their users.”).
8. According to the Federal Trade Commission, under the Standards Development
Organization Act of 2004, “… the antitrust rule of reason applies to SDOs while they are
engaged in standards development activities.” See Standards Development Organization Act
https://www.ftc.gov/enforcement/statutes/standards-development-organization-act2004 [https://perma.cc/3HXX-GMFF]; see also 15 U.S.C. § 4301 (2004).
selection of the “best” technology for standardization, and patent,
(and/or other intellectual property,) rights.9
Critically, the selection of technical contributions into a standard
is not the result of economic competition. In economic competition,
sellers offer products or services, each having a combination of
features, one of which is its price. Buyers select from among these
offers the offer that best suits them, or that “maximizes their utility.”
For some buyers, the “best” offer is also the cheapest offer; for others,
the “best” offer is the highest-quality product; for still others, there
exists a tradeoff among price and features that leads them to an
intermediate-quality product, at an intermediate price.10 The car
market provides a familiar example. The resulting market
“equilibrium” is one in which the market “clears,” meaning that the
number of cars offered for sale equals the number of cars purchased,
at the equilibrium price(s).11
In contrast, within an SDO, selection of technical contributions
generally occurs without the use or knowledge of the price of the
contributed technology, for several reasons. First, most SDO rules
forbid the discussion of commercial terms or legal matters when
evaluating technical contributions. ,12 They do this advisedly, as those
SDO members who constitute technical standards bodies upstream
are typically also horizontal competitors downstream, in the
standardized product market.13 Conventional antitrust guidance
strongly discourages any price-based decisions among horizontal
competitors, whether in input or output markets.14 Second, even if
such discussions were permissible, the members of standards
committees are technical personnel charged with a common technical
mission, for which consideration of “the pricing of contributions” is
deemed both irrelevant and inefficient.15 Third, because patents are
typically licensed in portfolios or other large groups, neither they nor
the technical contributions they cover are “priced” individually.
Moreover, the hypothetical pricing of individual contributions would
almost surely conflict with the actual price charged when patents are
transacted in large groups, because there is no agreed-upon method of
adding up the “parts” to constitute the “whole.” At the very least, such
comparisons would multiply the potential for disputes, and would
expose the terms of confidential actual agreements.16 Finally,
contributions to a technical standard are typically made after a patent
application has been filed (to preserve the invention’s public novelty),
but before the patent has issued (typically several years later), during
which time the patent’s actual claims are subject to review, challenge
and potential rejection, leaving them in flux.17 Thus, it is unclear what
rights, exactly, are to be “priced” at the point the contribution is
14. See An Antitrust Primer for Federal Law Enforcement Personnel, at 4, 6. U.S.
DEP’T OF JUST. (Apr. 2005), https://www.justice.gov/atr/file/761666/download (“Price fixing
is any agreement among competitors which affects the ultimate price or terms of sale for a
product or service. It is not necessary, however, that the conspirators agree to charge exactly
the same price for a given item…. Price fixing, bid rigging, and market allocation are generally
prosecuted criminally because they have been found to be unambiguously harmful, that is, per
15. See ETSI Guide on Intellectual Property Rights (IPRS), supra note 12.
16. The only way to compare the hypothetical price of an individual contribution with
the actual price of a patent portfolio is to expose the portfolio agreement to independent
review. In general, there is no mechanism within an SDO that requires or protects the
disclosure of the confidential commercial information of SDO members. See U.S. Department
of Justice, supra note 14.
17. According to the United States Patent and Trademark Office, the average interval
from the time of patent application to the time of issuance, during which a patent’s claims are
examined and allowed or rejected, was about 33-40 months in 2011, approximately the date
that ETSI’s Long-term Evolution (LTE) standard was initially implemented in the United
States. See Pendency of Patent Applications (2 visuals), U.S. PATENT AND TRADEMARK
[https://perma.cc/84TZ-GG6L] (last visited May 22, 2018).
Once the set of technical contributions that together constitute
the standard is set, standard-compliant devices must adhere to the
standardized specification. To the extent that adherence to the
standard means practicing the claims of a patent, any such patent is
then considered a SEP.18 Again typically, however, SDOs do not
themselves determine whether any given patent is a
“standardessential patent.” In other words, even after a member’s technical
contribution has been accepted and adopted into the standard, any
patents associated with that contribution may nevertheless not meet
the definition of a SEP.19 The important point is that no one knows,
one way or the other, whether any given patent is essential to the
The Benefits and Costs of Standardization
Standardization presents a number of potential benefits and
costs. In addition to interoperability, the other principal benefit is that
the SDO is able to combine the best proposals from every member, to
create a common communications interface that is superior to – faster,
more reliable, cheaper than – any individual firm’s technology.
We can think of these two standardization benefits as “static”
and “dynamic.” The static benefit – one that occurs at a given point in
time, using off-the-shelf technologies – is the gain from
interoperability, that is, from requiring every device to work the same
way. The dynamic benefit – one that occurs over time – is the benefit
18. See ETSI IPRP Eur. Telecomm. Standards Ins. (Apr. 5, 2017),
(“’ESSENTIAL’ as applied to IPR means that it is not possible on technical (but not
commercial) grounds, taking into account normal technical practice and the state of the art
generally available at the time of standardization, to make, sell, lease, otherwise dispose of,
repair, use or operate EQUIPMENT or METHODS which comply with a STANDARD
without infringing that IPR. For the avoidance of doubt in exceptional cases where a
STANDARD can only be implemented by technical solutions, all of which are infringements
of IPRs, all such IPRs shall be considered ESSENTIAL.”).
19. For example, suppose that an SDO member proposes technical contribution A, an
invention that is also claimed by Patent 1. Suppose that the SDO adopts the substance of
contribution A, which it then codifies in technical specification B. To simplify its proofs of
infringement, the patentee files a “continuation” application, relying on the disclosure found in
Patent 1 but using the language of B to draft new claims; these issue as another member of the
same “patent family,” Patent 2. Then, assuming the definition of essentiality is met, Patent 2
may be “standard-essential,” but Patent 1 may not.
of inducing firms to compete to find solutions to each technical
problem, then choosing the best solution.
Standardization also has potential costs. The potential cost that
has captured by far the most attention from policymakers and
standards implementers – and from the SSOs themselves – is the
possibility of “hold-up” by the owner of a standard-essential patent.
Hold-up is a form of economic opportunism, by which one party to a
relationship takes advantage of the other party’s investment in that
relationship, by attempting to renegotiate terms after the second party
has sunk its investment.
For example, suppose in the winter a homeowner solicits
proposals from contractors to build a pool in the summer, on a
timeand-materials basis. The winning contractor takes a construction
deposit; the losers fill their summer schedules with other work.
Halfway through the job, the winning contractor demands an
additional “completion fee” to finish. With her construction at risk,
and unable to find another installer, the homeowner agrees to the
demand. The homeowner has been held “held up” by the contractor.
Of course, skilled attorneys anticipate such problems and draft
contracts to avoid them, and/or to make such opportunism
unprofitable. But when the parties cannot contract over the investment
(in this case, the homeowner’s selection of one installer to the
(permanent) exclusion of others), and when the price or another
contractual parameter cannot be specified in advance, the potential for
From a legal perspective, such opportunism is unfair. From an
economic perspective, the main problem with opportunism is that,
being foreseeable, it causes parties not to transact at all. In other
words, parties fail to invest in otherwise profitable relationships,
because they fear the counter-party will take advantage of them. Such
foregone transactions are economically inefficient.
20. More formally, hold-up occurs in the presence of two factors:
1. Parties to a transaction make noncontractible, relationship-specific
investments, before the transaction takes place.
2. Some parameter of the transaction (price, quality, quantity, date) cannot be
specified with certainty.
See William P. Rogerson, Contractual Solutions to the Hold-Up Problem, 59 REV.
ECON. STUD. 777, 777 (1992).
In the context of standard-essential patents, hold-up could arise
under the following facts:
(a) the owner of an SEP makes a technical contribution, any
implementation of which practices the claims of the patent;
(b) the SDO selects the contribution into the standard, without
specifying a price for the SEP;
(c) implementers invest in the implementation of the claims of
the SEP, as part of their implementation of the standard;
(d) the patent owner seeks “extra” payment for the use of the
SEP, exploiting the implementers’ prior implementation
investment and lack of alternatives.
Since such conduct by SEP owners is foreseeable, implementers
might refuse to invest in implementing the standard, thus depriving all
concerned of the benefits of standardization.
To pre-empt this undesirable outcome, SSOs routinely require
that those who contribute to a technical standard must promise to
forego such opportunism. This promise takes the form of a “FRAND
undertaking,” by which the holder of an SEP promises to be prepared
to grant a license on “fair, reasonable and non-discriminatory”
terms.21 Unlike most other SSOs, ETSI further requires that
contributors to technical standards disclose the identity of related
patent rights that “may be essential” to the standard.22 While
sometimes called “declared-essential patents,” patents identified in
this manner only have the (subjectively believed) potential to be
essential, at the time of the declaration.23
The “Standard FRAND Paradigm”
With this background, one can efficiently characterize what may
be called the “standard FRAND paradigm.” This paradigm appears as
a stock character in FRAND arbitrations and similar disputes.
Although it is empirically unsupported, and typically has little or no
relevance to the facts or expert testimony of an individual case, the
“standard FRAND paradigm” forms an important part of what (some)
parties deem to be fair conduct; the failure to conform to the paradigm
is, so this argument goes, per se evidence that a patent holder has
violated its FRAND undertaking.24
Under this paradigm, the relevant sequence of events may be
This sequence conforms to the textbook definition of a hold-up
problem: following the standardization of the technology by the SDO,
the implementer must invest in implementing the standardized
technology – not knowing whether, or in what form, patent claims on
the technology may exist, nor knowing their price. Eventually, the
patent office issues a patent, crystallizing its claims; still later, the
innovator/patentee offers to license the now-standard-essential patent,
at a price that the implementer finds “excessive,” and therefore a
violation of the patentee’s FRAND undertaking. The typical
explanation for the “excess”: hold-up by the patentee, who is
exploiting the implementer’s specific investment in the standardized
technology, for which the implementer now lacks any alternative.
The patentee may respond that the offered price is the same as
the actual price paid by existing licensees, as shown in actual
contracts. The patentee may further point to the ETSI IPR Policy
itself, which historically has favored the negotiation of such
contracts.25 But under the “standard FRAND paradigm,” the prices
observed in actual license agreements are themselves contaminated by
the patentee’s hold-up of its other licensees. They are, therefore,
uniformly unreliable and ought not to be admitted as evidence. In
other words, hold-up is so pervasive that one cannot even test for its
existence, given the available data.
The “standard FRAND paradigm’s” solution to this alleged
evidentiary vacuum is to postulate a so-called “ex ante price” for the
standardized patent. The “ex ante price” is the price that the patentee
supposedly could have charged, at a point in time before
implementers sink their investments into the standardized technology,
as shown in Figure 1, because it is at that point that the patentee
would have had to “bid” against competing alternatives for selection
into the standard, thereby “locking in” implementers to the
investment.26 That bid, so the paradigm goes, is the maximum value
that the patentee could have expected in a “competitive market,” and
reflects only the value of the technology itself – not the additional
market power, and potential for opportunism, conveyed by the
patent’s selection into the standard.27 The decision to value the
25. See, e.g., Interim Report of the UMTS IPR Working Group, EUR. TELECOMM.
STANDARDS INS. (Sept. 2008), http://www.qtc.jp/3GPP/GSM/SMG_27/tdocs/P-98-0608.pdf
[https://perma.cc/C799-M5RZ] (“The value of the ETSI IPR Policy as the sole vehicle for the
handling of IPR issues relating to standards lies in . . . the fact that the complex commercial
issues of the details of licenses and of compensation therefore, are placed where they belong,
at the center of bilateral negotiations between licensor and licensee”) (emphasis supplied).
26. Though not required as a matter of economic theory, implementers have argued,
and trial courts have sometimes accepted, that the price-determination date should also precede
the point in time when the SDO selects the patentee’s contribution. See, e.g., Ericsson, Inc. v.
D-Link Systems, Inc. 733 F.3d 1201, 1234 (Fed. Cir. 2014) (providing an example of how
courts have accepted the price-determination date from the point in time where the SDO
selects the patentee’s contribution).
27. The distinction between the “value of the technology” and the “value of the
standard” has found its way into patent damages law. See id. at 1233.
technology “ex ante” is said to conform to common practice within
patent damages law, which hypothesizes a negotiation between the
patentee and licensee “on the eve of infringement.”28
Further, when measuring the value of this hypothetical bid, the
court should consider only the “incremental value” of the technology
over its next-best alternative29 that would have been available to the
technical standards body – again, a widely approved approach in
patent damages law.30
Elements of the “standard FRAND paradigm” have found their
way into high-level policy statements echoed by the major US
regulatory agencies.31 And as a legal matter, a patentee’s FRAND
undertaking is now treated as a contract with the SDO, of which an
implementer is a third-party beneficiary who has its own cause of
action for breach of the FRAND contract.32
28. See Integra Life Sciences I, Ltd. v. Merck KgaA, 331 F.3d 860, 870 (Fed. Cir.
2003) (noting that hypothetical negotiation occurs “at a time before the infringing activity
began”). Accord Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1324 (Fed. Cir. 2009);
LaserDynamics, Inc.v. Quanta Computers, Inc., 694 F.3d 51, 75 (Fed. Cir. 2012) (holding that
hypothetical negotiation takes place the date infringement began).
29. See Microsoft Corp. v. Motorola Inc., et al., No. C10-1823JLR, 2013 WL 2111217,
at *27-28 (W.D. Wash. 2013) (holding that a comparison of the patented technology to the
alternatives that the SDO could have written into the standard is a consideration in determining
a RAND royalty).
30. See Grain Processing v. American Maize Prod. Co., 185 F.3d 1341, 1341 (Fed. Cir.
1999) (“Only by comparing the patented invention to its next-best available alternative . . . can
the court discern the market value of the patent owner’s exclusive right, and therefore his
expected profit or reward”).
31. See, e.g., Policy Statement on Remedies For Standards-Essential Patents Subject to
Voluntary F/RAND Commitments, U.S. DEP’T OF JUST. (Jan. 8, 2013),
[hereinafter DOJ SEP Policy].
32. As courts have found, when a holder of a standards-essential patent makes a
commitment to an SDO to license such patents on F/RAND terms, it does so for the intended
benefit of members of the SDO and third parties implementing the standard. These putative
licensees are beneficiaries with rights to sue for breach of that commitment. See Microsoft
Corp. v. Motorola, Inc., 864 F. Supp. 2d 1023, 1030-33 (W.D. Wash. 2012); Microsoft Corp.
v. Motorola, Inc., 854 F. Supp. 2d 993, 999-1001 (W.D. Wash. 2012); Microsoft Corp. v.
Motorola, Inc., 696 F.3d 872, 884 (9th Cir. 2012) (“[The] district court’s conclusions that
Motorola’s RAND declarations to the ITU created a contract enforceable by Microsoft as a
third-party beneficiary (which Motorola concedes), and that this contract governs in some way
what actions Motorola may take to enforce its ITU standard-essential patents (including the
patents at issue in the German suit), were not legally erroneous.”); Apple, Inc. v. Motorola
Mobility, Inc., —- F. Supp. 2d —-, No. 11-cv-178bbc, 2012 WL 3289835, at *21-22 (W.D.
Wis. Aug. 10, 2012); Apple, Inc. v. Motorola Mobility, Inc., No. 11-cv-178bbc, 2011 WL
7324582, at *7-11 (W.D. Wis. June 10, 2011). See DOJ SEP Policy, supra note 31, at 7.
While FRAND-based licensing policies have given rise to
dozens or hundreds of voluntary licenses, some implementers insist
that the entire regime that produced these licenses “does not work.”33
For example, Apple insists that using the price of a handset, such as
an iPhone, to meter the value of a standard-essential patent portfolio
is “inherently discriminatory,”34 and therefore non-FRAND.35
Similarly, Apple claims that the “best” method for determining
royalties for standard-essential patents practiced by a handset is to
employ the price paid for the so-called “smallest salable patent
practicing unit,” which Apple identifies as the handset’s baseband
processor chipset – a method not employed in actual industry
agreements.36 Despite having launched arguably the most successful
consumer product in history, Apple even claims to have “faced
excessive royalty demands, onerous contract terms and the threat of
injunctions barring the sale of a revolutionary new product,” “a
history . . . [that] has left [the FRAND licensing] promise at least
partially unfulfilled.”37 Faced with these economic headwinds, Apple
has sold just 1.2 billion iPhones in 10 years, worth $738 billion.38
In this ostensibly fallen world, some widely cited commentators
have argued that arbitration of FRAND terms and conditions is not
only advisable, but should be made mandatory by the SDO.39
Whether an SDO mandates arbitration or not, under the “standard
FRAND paradigm” arbitrators face a formidable array of “settled”
justifications for FRAND policies in general, and for vindicating the
rights of the implementer in particular, that invariably point to a
reduction in the rates to be paid for standardized technology –
regardless of how many others may have voluntarily accepted those
rates in the past. The present question is whether the “standard
FRAND paradigm” assists arbitrators in executing the task before
them: to identify terms and conditions that are truly “fair,”
“reasonable” and “non-discriminatory.”40 The short answer to that
The Failures of the Standard Paradigm
The simplest way to encompass the standard paradigm’s errors
in a single view is to consider the differences between the static gains
from standardization, and its dynamic gains. In the standard
paradigm, gains arise from the agreement by all participants to settle
on a single, agreed-upon, existing technology. These are the gains
from agreeing to drive on the same side of the (existing) road. Since
the alternatives – left side or right side – already exist and are largely
equivalent, it makes little or no difference which alternative becomes
“the standard.” And any reward to the chosen alternative is simply a
windfall, since both the chosen alternative and its perfect or
nearperfect substitutes came into existence exogenously, before the
possibility of standardization even existed. Society gains, not from
the particular alternative, but from the coordination that results from
agreeing on a single alternative. In short, these are “coordination
gains.” Rewarding the (private) owner of the chosen alternative for
the (social) decision to coordinate is not only misplaced; it is “unfair,”
because any such reward comes at the expense of those for whom the
coordination occurs: implementers, and their customers.
But this account of technological standardization leaves
unexplained where the candidate technical contributions came from –
it simply assumes their existence. Such accounts of the process are
“static,” because they assume (and hold constant) the state of
technology as it exists at the single point in time when coordination
40. While it is still in wide circulation among competition-oriented economists, evidence
for any of the constituent elements of the “standard FRAND paradigm” has been found
lacking. See e.g. Certain 3G Mobile Headsets, Inv. No. 337-TA-613, USITC Pub. 4145 (Apr.
2015) (Remand) at 63 (“Of all the settlements and licenses that were taken under the ‘threat’ of
an exclusion order, not one respondent has gone on to file in a district court that the agreement
was outside the range of FRAND. The ITC has not seen such a case, the experts presented at
the hearing have not seen such a case, and the respondents did not cite an example of such a
case. With that in mind, perhaps now we can relax our guard a little.”).
occurs. In contrast, by far the greater gains from standardization are
“dynamic” – that is, those gains induced over time by improvements
in technology. These gains arise because innovators invest in R&D,
with the fruits of which they compete for selection into the standard.
That selection process is fundamentally different from market-based
R&D competition, because it is “winner take all”: the best invention
is culled from among those proposed, and is then used by all firms;
the other candidates are discarded. The errors introduced when the
outcomes realized under static market competition are substituted for
those appropriate to a dynamic, winner-take-all regime are
wellknown, as I explain below. 41
In short, for all of the supposed consensus reflected in the
“standard FRAND paradigm,” the trouble with the paradigm is that it
contradicts standard economics. For this reason, the paradigm also
cannot produce “FRAND outcomes.”42 At each step, the paradigm is
incomplete, or flat wrong.
1. The Sequence of Investments
The sequence of events under dynamic standardization is shown
in Figure 2. In order for the SDO to have something to standardize,
contributors to the standard must first conduct R&D, to develop
potential contributions. R&D is, of course, a costly investment.
41. As I explain below, the result of such a policy is “dynamically inconsistent.”
42. See Jonathan D. Putnam, The “Standard FRAND Paradigm” is Not Standard. Or
FRAND (2017) (unpublished manuscript) (on file with author).
R&D conducted in anticipation of potential standardization does
not arise randomly or exogenously, of course. Firms invest in R&D
because the SDO – usually with the innovating firms’ participation –
has promulgated certain general objectives for the standardized
technology. R&D conducted in anticipation of potential
standardization is also, therefore, a “relationship-specific” investment,
because standardization – by definition – reduces or eliminates
alternative uses of technologies that are not selected into the standard,
but could have competed with it. There is usually no “second SDO”
or other customer to whom a losing contribution can be offered.
As with static standardization, the process of dynamic
standardization proceeds with the selection of one contribution into
the standard from among those proposed, followed by investments by
implementers, issuance of the patent, and license negotiations, as both
Figure 1 and Figure 2 show. We can therefore conceive of dynamic
standardization as economists often do, as a two-period model in
which innovators conduct R&D in the first period, while the SDO
standardizes on the winning technology to be implemented in the
second period. Figure 2 shows how the “standard” model of static
standardization is embedded within the dynamic model. Thus, in this
context as in many others at the intersection of intellectual property
and antitrust policies, the two-period process of dynamic
standardization contains static standardization (in the second period)
as a special case, when there is no need to explain where the
standardized inventions came from. Of course, when standards evolve
with technological change – and a principal objective of
standardization is to ensure that technological change occurs as
rapidly and efficiently as possible – such “special cases” are not only
irrelevant, but misleading.
Thus, the first error of the standard paradigm is to ignore both
the investments required to generate the candidate contributions from
which the SDO will choose, and the inducements on which such
investments have relied.
2. The Hold-up Problem
As we have seen, hold-up can occur when parties make
noncontractible, relationship-specific investments, and when they cannot
specify in advance all the terms of the contract governing their
relationship.43 By this definition, innovators also face hold-up: to
compete for selection into the standard, they must (1) invest in R&D;
but they do so (2) with no assurance of the price or other terms of
their compensation, other than that such compensation is supposed to
Because both innovators and implementers make
relationshipspecific investments, and because neither group can specific ex ante
the terms of the contract on which they will eventually agree, the
standard-setting process inherently contains the potential for bilateral
hold-up. As with hold-up by innovators, hold-up by implementers
takes the form of exploiting the innovators’ prior (R&D) investment
to extract opportunistic gains from the relationship. Just as innovators
can hold up implementers by demanding a price that is “too high” ex
post, implementers can hold up innovators by demanding a price that
is “too low” ex post. The “hold-up problem” is therefore symmetric.
When implementers hold up innovators, the situation is
sometimes called “reverse hold-up” or “hold-out.”45 The “standard
43. Rogerson, supra note 20.
44. See ETSI Guide on Intellectual Property Rights (IPRS), supra note 12 (IPR holders
whether members of ETSI and their AFFILIATES or third parties, should be adequately and
fairly rewarded for the use of their IPRs in the implementation of STANDARDS and
45. See infra note 42.
Yet, despite their extensive training in the drafting and
interpretation of contracts, including the often-adversarial process of
selecting a unique combination of terms that satisfies both parties and
that trades off one party's concerns against the other’s, lawyers,
judges and other neutrals are (in the author’s experience) often easily
convinced that there ought to be some mathematical way to compare
the “economic terms” of two contracts, using a single number. The
invitation to abandon settled principles of contract interpretation
(requiring that terms be evaluated jointly), in favor of an economist’s
reductionist, one-dimensional calculation, is often hard to resist, at
least for the mathematically untrained. Resistance is even more
difficult when there exists a legal norm like “non-discrimination,”
which seems virtually to require that such one-dimensional
comparisons be made, to establish or refute a claim of discrimination.
Example 1. To see how matters can go wrong, consider the ways
that some economists handle the comparison of running royalty and
fixed-payment contracts. Licensee A, who agrees to a $1 per unit
royalty, owes $200 if sells 200 units; the contractual rate is $1/unit.
Licensee B, who agrees to a fixed payment of $100, owes $100 if it
sells 100 units, or 200 units; there is no contractual rate. However, in
the event that sales are 200 units, an economist may compute an
“effective rate” of $100 / 200 = $0.50 per unit. He then compares B’s
agreement to A’s, and argues that B’s contract exhibits a “lower rate.”
But that argument is erroneous: the economist is comparing a
contractual term, for which the parties bargained, with a
noncontractual term, invented by the economist. Thus, the first analytical
error is “comparing the contracts” by comparing contractual with
A related, but conceptually distinct point is this: if one assumes
that each licensee sells 200 units, then Licensee B received the lower
“effective rate.” If instead one assumes that each licensee sells 50
units, then Licensee A received the lower “effective rate.” But these
comparisons depend on knowing the actual number of units that will
be sold – a fact that the parties did not know when they contracted.
Thus, the second analytical error is comparing the contracts using
hindsight, by imputing to the parties information about the future that
they did not have.82
2. Example: Price Caps
Once one discovers how to compute non-contractual “effective
rates” and to compare them with contractual rates, the potential for
mischief is virtually unlimited. For example, consider the common
practice of including “caps” on royalty payments. One justification
for a cap is that the licensed device (such as a smartphone) contains
components (such as a diamond-studded case) whose value is
unrelated to the licensed technology. The licensee argues that it
should not pay a royalty on that portion of the device price “above”
the portion attributable to the licensed technology.
Example 2. To implement a cap, the parties agree to a maximum
payment per unit, regardless of its price: for example, “1% of price
subject to a cap of $2 per unit.” In this case, the royalty payment
increases smoothly until the price of the licensed unit reaches $200, at
which point it reaches the cap; no further payment is required on that
unit. Suppose that Licensee A sells a device priced at $300, and
agrees to these “rate + cap” terms. Then, because the cap is binding,
its payment will be $2 per unit – an “effective rate” of $2 / $300 =
0.67%. Suppose Licensee B also agrees to a 1% contractual rate with
a $2 cap – the same contract. But Licensee B sells a device priced at
$150. In that case, because the cap is not binding, the “effective rate”
is $1.50 / $150 = 1%. An economist comparing “effective rates” will
conclude that Licensee B has suffered “discrimination” because it
pays at a higher “effective rate” – even though both parties negotiated
the exact same terms. Again, this comparison and conclusion are
erroneous: the difference in “effective rate” is not due to differential
treatment by the licensor, but to differential behavior by the licensee.
Example 3. In more complex and realistic contracts, the potential
for abuse worsens. Consider the case in Figure 5, which generalizes
the “cap” example slightly by allowing each firm to sell two types of
handsets, a high-price handset (at $400), and a low-price handset (at
$100). Each firm sells 100 units. They differ only in the mix of
82. Again, if the “information from the future” is an accurate proxy for the expectations
of a party at the time of contracting, then this potential distortion may be eliminated. But the
question remains: if private expectations differ, which party’s expectations are controlling?
handsets they sell: Licensee A sells mostly low-price units, while
Licensee B sells mostly high-price units. But they also negotiate
different license terms: Licensee A pays royalties at the rate of 1.25%
of sales, subject to a $2 cap, while Licensee B pays at the rate of 2%
of sales, subject to a $3 cap.
One might easily infer that Licensee B’s terms are “worse” than
Licensee A’s: both its per-unit royalty rate and its per-unity royalty
cap are higher. Yet, as Figure 5 shows, a comparison of their
“effective rates” rejects this conclusion: because Licensee B sells a
different mix of handsets, its “effective rate” is 0.83% – significantly
less than the 1% “effective rate” paid by Licensee A.
The immediate lesson here is that “effective rates” are not only
“not effective” for making one-dimensional comparisons between
multi-dimensional contracts, but their use actively misleads the trier
of fact, typically by suggesting discrimination where it does not exist.
Economists who know this technique routinely abuse it; arbitrators
believe them at their peril.
But the larger point is this: negotiating firms usually know their
interests. Their decisions, particularly the contractual terms to which
they agree, generally should be relied upon as an indication of what is
“fair” and “reasonable,” absent compelling evidence to the contrary,
because they have better information about their contemporaneous
interests and beliefs than does an ex post trier of fact.83
The general principle – that contracts must be compared based
on all of their terms, not on a single, non-contractual “effective rate” –
should be uncontroversial. But FRAND litigants and their economic
experts routinely flout it, both in litigation and in arbitration. Such
attempts should be shut down before being evaluated on the merits,
because they are legally erroneous.
For example, in Certain Wireless Devices,84 the respondents
argued that complainant InterDigital had violated its FRAND
commitment by discriminating against them, based on an analysis of
the ostensible “effective rates” that the respondents calculated from
InterDigital’s licenses. On the merits, no such discrimination was
found. But as a threshold legal matter, the administrative law judge
rejected the claim that such comparisons should be made at all:
The FRAND nondiscrimination requirement prohibits “unfair
discrimination,” but it does not require uniform treatment across
licensees, nor does it require the same terms for every
manufacturer or competitor. Respondents base their argument
that InterDigital’s license offers are discriminatory on their
calculation of the “effective royalty rate” of the offers. A
nondiscrimination analysis, however, requires an examination of
the whole of each license agreement, and not just the effective
Similar comparisons are routinely made between existing
contracts, or between contracts and offers, involving volume
discounts, regional royalty rates, released (past) sales and expected
(future) sales, and similar contractual terms. In each case, the
arbitrator is urged to forego the actual terms of the contract in favor of
the non-contractual calculations of the economist. In each case, that
suggestion leads to error.
These errors extend naturally to the choice of contracts that are
employed for comparison. A contract that is alleged to be
“comparable” for FRAND purposes is, in reality, selected by the
economist because its terms can be manipulated to produce a more
favorable “effective rate.” In the FRAND context, the possibility of
this kind of strategic manipulation of the evidence by the expert
exacerbates the intrinsic difficulties posed by the indeterminacy and
private beliefs reflected in any individual agreement.
An arbitrator can sometimes, as in Example 2, diagnose such
errors by applying the terms of an allegedly superior contract to the
circumstances of the supposedly disadvantaged licensee, and
comparing the licensee's total payment under each set of terms. As in
Example 2 (where the terms of the “better” contract were identical to
those of the “worse” contract), this procedure can verify that the
contracts are non-discriminatory, by holding constant the licensee’s
conduct and circumstances, and isolating the effects of the contract
The Downward “Non-Discriminatory” Spiral
When relying on one or more “comparable” agreements for
FRAND comparisons, economic experts frequently misinterpret and
misapply the terms, to generate proposals for “equivalent” licenses
that are economically and competitively unlike the agreements on
which they rely. This procedure has the effect of ensuring that
discrimination occurs – but in favor of the prospective licensee.
In the FRAND context, a particularly common and pernicious
strategic manipulation of “effective rates” is the inconsistent
treatment of running royalties. Such royalties are typically expressed
either as a percentage of price, or a fixed royalty per unit. As long as
1000 FORDHAM INTERNATIONAL LAW JOURNAL
licensees differ in their prices, one of these expressions can always be
manipulated to produce a better “effective rate.”
For example, suppose that the licensor’s benchmark agreement
is a contract with Licensee A that defines the royalty as “1% of sales.”
Suppose that A has an average selling price of US$100, and so pays
an “effective rate” of US$1 per unit. B, a prospective licensee with an
average selling price of US$200, compares (1) the payment implied
by A’s actual contract term (1% of US$200 = US$2 per unit) with (2)
A’s “effective rate” (US$1 per unit), then demands the lesser of the
two, arguing that anything else violates the licensor’s FRAND
undertaking not to discriminate. The licensor (or an arbitrator or other
“FRAND rate-setter”) then accedes to B’s demand. Seeing the
licensor acquiesce to B, prospective Licensee C, whose average
selling price is US$50, makes a similar comparison: (1) pay at B’s
US$1 per unit actual contract term, or (2) pay at B’s “effective rate”
of $1 / US$200 = 0.5%. Again invoking the licensor’s FRAND
commitment, C demands and receives “the same” 0.5% “effective
rate” for itself, which results in a payment of 0.5% x US$50 = $0.25.
Observing C’s deal, prospective Licensee D, whose average selling
price is US$100 (the same as that of benchmark Licensee A), once
again compares (1) the payment implied by C’s actual contract term
(0.5% x US$100 = $0.50), with (2) C’s “effective rate” (US$0.25 per
unit), and demands and receives “the same” “effective rate” for itself.
The resulting “effective rate” – US$0.25 / US$100 = 0.25%) – is, of
course, one-fourth the rate paid by Licensee A – even though
Licensee D sells at exactly the same price.
The success of this strategic manipulation lies in swapping out
the actual form of the rate found in each benchmark contract
(percentage or per-unit) in favor of the “effective rate” expressed in
the other form (per-unit or percentage) – thereby gutting each
contract’s actual term. Across multiple licensees, this process results
in a persistent, immutable decline in the rates actually paid – the
“downward non-discriminatory spiral.” The central error lies in
permitting each successive licensee to deviate from the express terms
of the prior contract to improve its position, via an “effective rate,” by
invoking the “non-discrimination” provision of the licensor’s FRAND
This same downward spiral is generated by demands for other
types of concessions: volume discounts;86 fixed versus running
royalty structures; and so on. Each licensee claims to want nothing
more than “the same” deal as that negotiated by a prior licensee, yet
the downward spiral ensues because licensees sometimes take account
of price, volume or other differences between themselves and other
licensees (“conditional uniform treatment”), and at other times ignore
such differences (“unconditional uniform treatment”). The demand
for non-discrimination, inconsistently applied, consistently causes
discrimination to result.
While not applicable on the whole to FRAND licensing, the law
of most-favored licensee (“MFL”) clauses is informative as to how to
analyze allegations of discrimination in the FRAND context.87 The
law requires an MFL licensee to accept both the good and the bad
terms of a benchmark contract, rather than allowing the licensee to:
cherry-pick only the helpful provisions of the contract (or not meet all
of its conditions); choose individual provisions from multiple
contracts; or fabricate fictional “effective” terms that are not, in fact,
found in any contract at all.88
By adhering to this principle, arbitrators can reduce, if not
eliminate, this kind of error when enforcing the actual language of an
SEP owner’s FRAND undertaking: ensure that a FRAND licensee
receives only the entire package of “FRAND terms,” not just a
“FRAND rate” – and only after meeting the entire package of
“FRAND conditions” that are actually found in a “comparable
86. For example, large licensee B demands a volume discount (0.75%) relative to small
licensee A (1%) (claiming that the failure to account for B’s larger sales volume constitutes
“discrimination”); small licensee C demands “the same” rate as B (0.75%) (claiming that
taking account of differences in sales volume constitutes discrimination); large licensee D
demands a volume discount (0.5%) relative to C (citing B); etc.
87. To the best of my knowledge, no court has held that a licensor’s FRAND
undertaking implies MFL treatment. If a licensee wants MFL treatment, that term must be
made express in the license.
88. Dratler, supra note 70 at §9.04 (holding that “where the license containing the
[MFL] clause and later licenses differ significantly in terms or conditions, the most favored
licensee cannot pick and choose among them, but must accept the good terms and conditions
with the bad. If terms besides the royalty rate are changed, the favored licensee cannot receive
the more favorable rate without also accepting any less favorable terms.”).
89. See id. While the need to adhere to the “entire package of terms and conditions”
should be uncontroversial in principle, it may not be easy to enforce in practice. As the
Other Structural Biases
1. The Alleged Upward Bias in Royalty Rates
It is, of course, not the job of an individual finder of fact to
engage in systemic reform. Yet the supposed need for such reform is
implicit in the static standardization narrative, which uniformly warns
against supra-normal royalties resulting from the specter of hold-up.
While not explicitly arguing for systemic reform, individual
litigants often hypothesize systemic bias when characterizing the data
available to any given fact-finder.90 Because of the systemic threat of
hold-up, so goes the argument, actual license agreements are afflicted
with an upward (that is, licensor-favoring) bias in the observed terms
and conditions, despite the licensor’s obligation – and the awareness
of all prior licensees of that obligation – to be prepared to grant a
license on FRAND terms and conditions. To the prospective licensee
“downward non-discriminatory spiral” example shows, even the simplest contract term, such
as a percentage-of-price royalty rate, can be recharacterized to mean something different to a
subsequent licensee if (say) the subsequent licensee’s price is different. Thus the benchmark
contractual term, “1% of sales” is not usually accompanied by a parallel benchmark condition,
“as long as you are selling at a price of $100,” chiefly because such conditions restrict the
ability of the licensee to alter its price, and force the parties to contract over contingencies that
are irrelevant to their own agreement. But when the benchmark term “1% of sales” is applied
to a subsequent licensee whose price is $200, the subsequent licensee can then argue that the
benchmark contract did not contain any “price condition,” so it would be wrong to read that
condition into the benchmark contract when applying it to the subsequent licensee. Therefore,
goes the argument, the “true” “effective rate” of the benchmark contract is $1 per unit, not 1%
[= $2] per unit.
Similar facts that may have informed the parties’ expectations and impacted the
contractual rate, but that may not themselves have constituted an explicit condition of the
benchmark license, could include: the volume of licensed sales; the location of sales; product
attributes; complementary business relationships; a cross-license; the potential list is long. The
absence of an explicit condition in the benchmark contract means that arbitrators should be
especially cautious in applying the terms of a “comparable” agreement to a subsequent
licensee, which has the incentive both to emphasize favorable contractual terms while ignoring
unfavorable factual dissimilarities, and/or to emphasize factual similarities while ignoring
unfavorable contractual terms.
Of course, licensors have the opposite incentives, and may make similarly selective
arguments using “comparable” agreements. But FRAND licensors, unlike licensees, have
already contracted not to discriminate against licensees; under contemporary readings of the
FRAND undertaking, licensees are beneficiaries of that contract, but have not themselves
contracted, with respect to discrimination or otherwise.
90. See Lemley & Shapiro, supra note 2; Joseph Kattan and Chris Wood,
StandardEssential Patents and the Problem of Hold-Up, (Dec. 19, 2013),
who wishes to avoid accepting the same terms as the existing
licensees, this supposed bias contaminates all the prior contracts
available to the fact-finder, no matter how consistent their terms.
Thus, without explicitly demanding or justifying systemic reform, the
prospective licensee indicts both “the system” and the negotiations
conducted under it, discounting or eliminating the evidentiary value
of the contracts produced in the instant proceedings. It follows that
the only “fair” outcome is to implicitly repudiate these prior
agreements, and to construct a brand-new set of “fair” terms and
As an empirical matter, the proof of such bias would require the
proof of some benchmark true value for a variable like the “FRAND
rate,” coupled with evidence that the observed value of the variable
deviates systematically from that benchmark. For example, the proof
of upward bias in royalty rates might be made via an economic model
demonstrating that, absent the systemic threat of hold-up, industry
royalty rates would be 10% lower. Such a proof would clearly
establish the true royalty level, and measure the degree of bias
observed relative to that level.
If offered, such proof would present the fact-finder with a
difficult choice: whether to award “FRAND terms and conditions”
that conform to prior agreements (on non-discrimination grounds) or
whether to adjust the terms downward to remove the effects of bias
evident in those prior agreements (on fairness grounds). But, however
it might be resolved, each horn of that dilemma would have the
advantage of having been grounded in fact and empirically supported.
The problem is that there is no such economic model of “hold-up
bias.” No economist has ever purported to measure the “percentage
of upward bias” resulting from the residual “threat of hold-up” that
ostensibly persists despite every licensor’s universal FRAND
commitment. The assertion of such bias is a fiction, conveniently
unprovable, used to undermine the reliability of prior license
agreements, permitting the licensee to seek fresh, “unbiased” terms
from the fact-finder.
2. Evidence of Systemic “Upward Bias”
One important reason why economists have not measured the
“degree of upward bias” resulting from the “threat of hold-up” is that,
despite widespread warnings from antitrust agencies and academics,
economists have never observed, and courts have never found, an
actual instance of hold-up by a telecommunications firm subject to a
In International Trade Commission Inv. No. 337-TA-613
(Remand), the administrative law judge once again confronted the
assertion that hold-up is a pervasive, systemic problem (an assertion
made in prior investigations involving similar parties and facts).93 The
ALJ reviewed the evidence for this assertion exhaustively. For
There is no evidence presented in this case that patent hold-up is
a problem in the telecommunication industry. The
Telecommunication Industry Association (TIA) in a June 11, 2011
response to the FTC’s request for comments . . . stated that: “TIA
has never received any complaints regarding such ‘patent
holdup’ and does not agree that ‘patent holdup’ is plaguing the
information and telecommunications technology (ICT) standard
The FTC also made other comments that have been brought to
the attention of the ALJ in this matter, such as “The FTC has
recognized that the risk of patent ‘[h]old-up in the standard
setting context can be particularly acute.’” Once more, however,
the FTC provides no data that would demonstrate such holdup is
occurring. Respondents also cite to the FTC comments in [ITC
Inv. No.] 337-TA-745 which provided a similar concern that
hold-up was a possibility if an exclusion order were to issue.
Respondents did not note that the FTC took no position as to
whether that had happened in the case, and have not found a
hold-up in any case since.95
92. Of course, courts have awarded royalty rates lower than those requested by a
licensor. But disagreement over the correct rate is not per se evidence of hold-up, as that term
is actually defined.
93. See Certain Wireless Devices With 3G Cap Capabilities, USITC Inv. No.
337-TA800 (Jun. 28, 2013) (Public Version).
94. See Certain 3G Mobile Headsets, Inv. No. 337-TA-613, USITC Pub. 4145 (Apr.
2015) (Remand) at 63-64.
95. See id. at 60 (internal citations omitted).
In 337-TA-868, the ALJ found little reason to give weight to the
agencies’ comments, as they were speculative as to what could
happen, and did not provide any evidence that holdup had
occurred. There is now even more reason to give little weight to
the concerns voiced by the FTC and DOJ/PTO in these letters.96
The ALJ went so far as to query Microsoft’s economist, a
published advocate of the “standard FRAND paradigm,” on the
empirical evidence for hold-up:
The ALJ asked Dr. Shampine if he could cite even one solid
example of a holdup resulting in a non-FRAND contract. Dr.
Shampine replied, “We do not have a solid example of that
Finally, the ALJ noted that Microsoft’s assertion that hold-up
was a systemic problem appeared to be opportunistic, being belied by
its prior submission to the FTC:
In short, the ALJ found that:
The notion that patent hold-up is a substantial problem that
should be addressed by government action seems to stem from a
largely theoretical analysis of the situation . . .
We believe that there is an important difference between
intentional or deceptive conduct in connection with patents that
read on standards and routine bilateral disagreements over
licensing terms for the use of patented technology.
In the former context, there seems to be a dearth of examples of
actual patent hold-up with regard to the essential patent claims
reading on a standard. Microsoft has never been accused of
patent hold-up in this regard, nor has it accused any other
company of such behavior.98
In that time [since the FTC’s initial inquiry into hold-up], the IP
community has been vigilant and has kept a watchful eye on the
ITC to ensure that patent holdup was not occurring. The result
has been not a single case of holdup has been noted. Not one
witness in this hearing was able to provide a single example of a
holdup due to an exclusion order, or potential exclusion order.
After watching for a holdup since 2011, we may be able to
96. See id. at 61.
97. See id. at 45.
98. See id. at 64-65 (quoting Letter from Microsoft to the Federal Trade Commission
(June 14, 2011) (emphasis supplied in the Initial Determination).
consider whether the fact none has occurred allows us to discount
the risk today.99
Despite this absence of evidence, claims that the “threat of
holdup” has distorted the terms observed in all prior licenses feature
pervasively in “FRAND rate”-setting proceedings, even today.
3. Downward bias
As explained above, licensors confront the symmetric problem
of “holdout” by prospective licensees. Holdout means delay, perhaps
indefinitely, in the payment of royalties for standard-essential patents.
Unlike hold-up, which remains unobserved and for which no
testable models or empirical measures exist, holdout has been defined
and proved in court,100 and can be modeled and measured relatively
easily as a reduction in marginal cost.101 While the mathematics are
somewhat complex, the intuition is simple: by holding out, a firm
obtains a cost advantage over a competitor who is licensed. That cost
advantage translates into a competitive advantage: a larger market
share for the unlicensed firm, and a smaller market share for the
licensed firm. Given the standard relationship between price and cost,
the holdout firm’s cost advantage also translates into a price
advantage, forcing the licensed firm to reduce its price as well. Thus,
by increasing the holdout firm’s market share, and reducing industry
prices, holdout increases the share of unlicensed sales, and reduces
both the number of units and the prices of licensed sales. Both effects
reduce the royalties actually received by the licensor.
By taking market share from the licensed firm, the holdout firm
introduces a third effect. A firm that chooses to license in the
presence of holdout by a third party does so despite its recognition
that it will be placed at a competitive disadvantage. Thus, as an
inducement to enter into a license, the licensing firm will demand a
lower royalty rate, to reduce the degree of that disadvantage. In other
words, holdout by unlicensed firms puts downward pressure on the
99. See id. at 61.
100. See id. at 66 (”[The] evidence in this case supports a finding that [Microsoft]
engaged in reverse holdup or holdout.”).
101. Jonathan Putnam et al., Holdout Games (2018) (unpublished manuscript) (on file
rates to which licensed firms will actually agree. Again, the result is
to bias downwards the royalties actually received by the licensor.
Given the confidentiality of license agreements, it is difficult to
measure precisely the extent of this bias on a global basis.102 But in an
individual arbitration, in which both the licensor’s and the licensee’s
prior agreements have been admitted into evidence, the fact-finder
may ask an important diagnostic question: for what share of the
industry’s standard-essential patents is the licensee currently paying
royalties to the holders of SEPs? The answer to that question helps to
identify the actual degree of downward bias in the licensee’s cost and
price, and thus the extent to which royalty payments based on the
licensee's price under-compensate the licensor.
One may well ask why “the system” permits these distortions to
occur. The simple answer is that SSOs permit implementers to
implement a standard without any binding commitment to pay for
patented technology embodied in the standard. The owners of the
patented technology must instead identify each implementer and, if
necessary, prove infringement.103 This “catch me if you can”
approach to an essential input is inherently inefficient and chaotic:
one can imagine the results if airlines were permitted to fly without
paying for jet fuel until “approached” by a fuel vendor. Of course,
commercial contracts foreclose this possibility, either by demanding
payment up front or by ensuring that claims for purchases paid in
arrears are simply and universally enforceable.
Such systemic, procedural weaknesses must, of course, be
addressed systemically. The putative setter of a “FRAND rate” cannot
solve this problem unilaterally. For present purposes, the point is this:
when confronted with unprovable claims of “upward bias” in the rates
found in the licensor’s existing licenses, arbitrators and other
“FRAND rate”-setters should resist the temptation to engage in
“systemic reform” on behalf of either party, while noting that, to the
102. See Jonathan D. Putnam & Tim A. Williams, The Smallest Salable
PatentPracticing Unit (SSPPU): Theory and Evidence 55 (2016) (manuscript at Table 1),
(summarizing publicly available evidence on license agreements among some major telecom
standard-essential patentees and licensees).
103. INTERIM REPORT OF THE UMTS IPR WORKING GROUP (1998) (articulating the
rationale that the value of the ETSI IPR Policy is that the complex commercial issues of the
details of licenses and of compensation therefore, are placed where they belong, at the center
of bilateral negotiations between licensor and licensee).
extent that the licensee’s price is biased downwards by holdout
(against the licensor and/or third parties), the licensor will not be fully
compensated even by a “FRAND rate” expressed as a percentage of
V. SPILLOVER EFFECTS OF ARBITRATION PANEL DECISIONS A.
The Persistent Effects of Bad FRAND Decisions
It is a truism that arbitrators and other triers of fact often must
confront sharply conflicting, and potentially misleading, expert
testimony. There is no magic cure for this disease, though the
preceding section can be read as a cautionary primer for the unwary.
Arbitrators must do the best they can with the evidence placed before
For better or worse, the decisions of arbitral panels are usually
neither precedential nor reviewable.104 While these features of
alternative dispute resolution solidify the harm from “bad,” but
persuasive, economic testimony, they also tend to limit the extent of
that harm, by confining its effects to an individual arbitration.
FRAND arbitrations are different. Because a licensor has
contracted not to discriminate among its licensees, a licensor whose
benchmark FRAND terms and conditions have been decided by
arbitration generally must submit the results of that benchmark award
for consideration by subsequent arbitral panels, whose duty it is (on
behalf of the licensor) not to discriminate with respect to the
The preceding section makes clear that the licensor’s
“nondiscrimination” obligation can be exploited in economic testimony to
create a “downward non-discriminatory spiral” – which is, of course,
discriminatory. Thus, an arbitration panel that awards “FRAND rates”
104. I intend this as an empirical observation, not as a statement of the law. The
circumstances under which the decision (concerning FRAND terms and conditions, or in
general) of an arbitral panel can or should be reviewed are outside the scope of this paper, and
of economics in general.
105. These conclusions follow from the general nature of the licensor’s FRAND
obligation. The point is to illustrate the mechanism by which the decision and findings of one
arbitral panel may be considered by a later panel. The observations of this section do not and
cannot interpret or inform the evidentiary or procedural requirements of any individual
arbitration, which are governed by contract.
derived from the (mis)interpretation of “effective rates” ends up
perpetuating and extending this discriminatory outcome in subsequent
arbitrations – its errors are not confined to its own award.
More generally, a licensor having multiple “benchmark”
licenses, the terms of at least one of which have been formulated by
an arbitration panel or other fact-finder, risks the possibility that the
panel is persuaded by “bad” economic testimony. As a result, those
fabricated terms will be inconsistent with the terms of the licensor’s
actual arm’s-length agreements. In the absence of the licensor’s
FRAND-derived non-discrimination obligation, that inconsistency
might be buried, along with other non-precedential and unreviewable
arbitral awards. But given that obligation, subsequent arbitrators must
confront this inconsistency, trying to determine what it means “not to
discriminate” among one set of license terms, negotiated by the
licensor, and another set of terms crafted by arbitrators, which are
inconsistent with the first set (and perhaps among themselves).
While arbitrators (and humans in general) are well-known for
their tendency to split the difference between these inconsistent
positions, that tendency is, itself, discriminatory.106 And of course,
splitting the difference creates additional inconsistencies down the
road for later arbitrators, who themselves must enforce the licensor’s
obligation not to discriminate among the (increasingly muddled)
awards to its licensees.
Economists refer to economic effects that are not confined to the
transaction in which they occur as “spillover effects.”107 For example,
when an innovator publishes a patent application, the disclosed
information “spills over” to other innovators, reducing the cost and/or
increasing the quality of their own innovations, thus speeding the
pace of technological change and increasing the intensity of
subsequent competition. Such “positive spillovers” are valuable
byproducts of the patent system; like the incentive to invest in the initial
106. One can well imagine the outcry if a claimant wage-earner – say, a member of a
racial minority – should have received an additional $1 per hour in wages, instead of the 50
cents she actually received, because an arbitration panel “split the difference” between her true
compensation and the $0 that her employer offered. Economic consequences aside, splitting
the difference between the claimant’s and respondent’s positions perpetuates and rewards
107. Wesley M. Cohen et al., R&D spillovers, patents and the incentives to innovate in
Japan and the United States, 31 RES. POL’Y 1349, 1349-67 (2002).
innovation, such spillovers “promote the progress of science and the
Inconsistencies among arbitral awards are an example of
“negative spillovers.” They hinder the recovery of investment returns,
increase transaction costs, complicate dispute resolution, promote
further disputes, and muddy subsequent decisions to invest in R&D.
Such inconsistencies represent a systemic failing in a system that is
supposed to “promote progress,” not only through individual
innovation, but through joint selection of the best among competing
individual innovations. In short, inconsistency deprives everyone –
including consumers – of some of the systemic gains from
standardization that they might otherwise expect.
While “equal treatment under the law” is, of course, a bedrock
principle of justice, and a principle that arbitrators and other triers of
fact generally strive to enforce, such treatment is subject to the usual
vagaries of human interpretation. Thus it is unsurprising, if
regrettable, that arbitration awards differ across complex
circumstances in which “non-discriminatory treatment” is difficult to
define, never mind to ascertain.
All that said, if one is to interpret a licensor’s FRAND
undertaking as a contractual commitment to an SDO, of which
standard implementers are third-party beneficiaries, then
“nondiscrimination” is not simply an abstract principle to be sought by
neutral arbitrators, but a contractual obligation assumed by the
licensor. This interpretation fundamentally alters the arbitrator’s role,
from “equal treatment” of the claimant and respondent to the
enforcement of a contractual claim by one party against the other.
When an arbitration panel fails to assess that claim accurately, it
makes three errors: (1) it fails to enforce the SDO contract; (2) it
introduces additional discrimination into subsequent comparisons also
based on that contract; (3) it hinders both the parties before it, and
subsequent parties that must grapple with its award, from receiving
equal treatment under the law.108
108. See supra Section IV.C.
1. Within-licensor Inconsistency
Because arbitral awards are generally confidential, they are not
subject to public comment or criticism. Thus, while the foregoing
structural problems are both plausible and widespread, they are also
difficult to illustrate with public data.
Since 2013, a number of courts have issued public decisions
concerning the appropriate “FRAND rate” for a standard-essential
patent portfolio.109 As we have seen, setting a “FRAND rate” is itself
a contractual misspecification, given a licensor’s undertaking to be
prepared to license on “FRAND terms and conditions.” Be that as it
may, such decisions and their bases are (at least partially) observable.
Perhaps the first such determination was made in a proceeding
brought by Huawei against InterDigital, in Huawei’s home town of
Shenzhen, China. Huawei sought a determination that InterDigital had
violated China’s Anti-Monopoly Law by, among other things,
abusing its “dominant position” and charging “excessive prices” for
InterDigital’s portfolio of SEPs.110 The Shenzhen Court agreed,
awarding to Huawei a “FRAND rate” of 0.019% of the handset price
– far less than InterDigital had sought and, presumably, far less than
the rates found in its many other licenses.111 On appeal, the
Guangdong Higher People’s Court affirmed.
Although the decision of the Shenzhen court was sealed,
InterDigital noted that the panel judges did not cite any factual basis
109. See generally Norman V. Siebrasse and Thomas F. Cotter, Judicially Determined
FRAND Royalties, in Jose Contreras (ed.), THE CAMBRIDGE HANDBOOK OF TECHNICAL
STANDARDIZATION LAW: COMPETITION, ANTITRUST, AND PATENTS (Cambridge: Cambridge
University Press, 2017).
110. Michael Han and Kexin Li, Huawei v. InterDigital: China at the Crossroads of
Antitrust and Intellectual Property, Competition and Innovation, COMPETITION POL’Y, INT’L
111. See Form 10-K, INTERDIGITAL, INC. (Dec. 31, 2012),
[https://perma.cc/6XEU-ATC7]. That the ruling was adverse can be inferred from
InterDigital’s appeal. That its result was materially different from InterDigital’s anticipated
licensing program can be inferred from InterDigital’s public disclosure obligations to its
for the royalty rate awarded.112 Contemporaneous reporting further
calls into question the court's commitment to enforcing the
“nondiscrimination” provision.113 This peculiar circumstance may appear
idiosyncratic. But it illustrates a more pervasive problem: the rate
awarded by the trier of fact may be disclosed, but the basis for the
rate may not be (because it depends on confidential or otherwise
unpublished facts). Needless to say, to the extent that the published
rate is sharply lower than the rest of a licensor’s licenses and offers,
for unobservable reasons, and that rate can be divorced from the
agreement’s (likewise unobservable) remaining terms and conditions,
prospective licensees have the obvious incentive to demand the “same
rate” on the grounds of “non-discrimination.” Such “bad decisions”
then follow a licensor around, like the undead, neither affirmed nor
repudiated, until they can be distinguished for reasons of age or
2. Between-licensor Inconsistency
Of course, “persistent bad decisions” are not persistent or bad
simply because they are unexplained. Sometimes the explanation
itself is inconsistent with “similar” decisions. And while there exist
mechanisms, such as courts of appeal, for reconciling inconsistent
legal decisions, those mechanisms do not exist for inconsistent factual
inferences, or inconsistent decisions across sovereign jurisdictions.
And they do not exist for inconsistent arbitral awards, at all.
Again to illustrate the potential for inconsistency, consider the
court’s reasoning in TCL v. Ericsson,114 a recent decision that
112. See id. at 136 (“The court further ruled that the royalties to be paid by Huawei for
InterDigital’s 2G, 3G and 4G essential Chinese patents under Chinese law should not exceed
0.019% of the actual sales price of each Huawei product, without explanation as to how it
arrived at this calculation”).
113. According to contemporaneous reporting, Qiu Yongqing, a senior judge who
presided over the case at the Guangdong Higher People’s Court, stated that:
Huawei “used antitrust law as a weapon to counterattack” monopolization by
multinationals in the technology sector, and that other Chinese companies
should learn from Huawei. He went on to suggest that Chinese companies
should utilize antitrust litigation to overcome technology barriers and thereby
better develop themselves.
See Han, supra note 110, at 9.
114. TCL Communication Technology Holdings, Ltd. v. Telefonaktiebolaget LM
Ericsson, No. SAVC 14-00341 JVS, 2013 WL 4150033, slip op. at 14ff (C.D. Cal. 2017)
purported to determine a “FRAND rate” for Ericsson’s SEP
portfolios. This decision adopted a so-called “top-down approach,”
under which the court determines a top-line aggregate industry
royalty rate for all SEPs, then divides this aggregate rate among each
of the firms holding SEPs, in proportion to the size of its portfolio
(perhaps after further adjustments).
While the TCL decision may be faulted on many legal,
conceptual and empirical grounds, for present purposes what matters
is that the court took as its starting point Ericsson’s 2008 belief that
the aggregate industry royalty rate would be “6-8%” of the handset
price for all LTE SEPs, and that Ericsson would own 20-25% of those
SEPs.115 The court reasoned that Ericsson’s “statements were thus not
a hope or prediction, but a pledge to the market that if the market
adopted Ericsson’s championed standard, the total aggregate royalties
would be calculated as described above.”116 While Ericsson
“point[ed] out that the publicly declared rates in 2010 from just nine
SEP owners totaled 14.8% of the handset selling price,” the court
“discounted” these conflicting beliefs.117 How Ericsson’s beliefs
could bind all others who contributed SEPs to “the market,” or how
third-party beliefs different from Ericsson’s might be reconciled with
Ericsson’s so as to preserve “fairness” or “non-discrimination,” the
TCL court did not explain.
In any event, it is useful to compare the TCL court’s assumption
of a 6-8% “pledged” aggregate royalty rate with the comparable
inference from the Huawei v. InterDigital award. InterDigital is
generally considered one of the top 10 holders of patents disclosed as
potentially essential to 2G, 3G and 4G standards, based on its quantity
of patents. Leaving aside questions of portfolio quality and “actual
essentiality,”118 it is reasonable to assume (for the purposes of
illustration) that InterDigital’s portfolio constitutes at least
approximately 1/25 (4%) of the industry total. That assumption
115. Id. at 22.
116. Id. at 24.
118. In other work, I have estimated the quality of firm-level patent portfolios using
generally accepted patent-citation methods. I have also estimated the firm-level probability
that a patent disclosed as potentially essential is “actually essential,” from multiple
largesample technical evaluations. While these measurements are empirically important to an actual
FRAND-based valuation of an SEP portfolio, they are beyond the scope of this paper and do
not detract from the present illustration.
1014 FORDHAM INTERNATIONAL LAW JOURNAL
implies that the aggregate industry royalty rate should be about 25 x
0.019% (0.475%), or a little less than one-half of one percent. But the
TCL court’s assumption (6-8%) is more than an order of magnitude
(12 to 16 times) greater than the aggregate rate implied from the
Note again that these “top line” conclusions apply to the same
body of essential patents, covering the same devices, in the same
industry. Under the “top-down method,” this range means that a
licensor’s total compensation can vary from $10 million to $120-160
million, even assuming that both parties agree on the licensor’s share
of the “top line.”
An arbitrator stepping into these waters could be forgiven for the
inference that, when published trial court decisions as to what
constitutes a “fair” and “reasonable” “FRAND rate” differ by this
much, there is in fact no generally accepted “standard” by which to
measure any such rate at all, and that the best course of action is to
approach the problem with “fresh eyes.” And so the cycle continues.
As we observed at the outset, the demand for FRAND
arbitrations springs from the demand for the resolution of disputes
that have little public precedent: the neutral pricing of unspecified
patents in large, uncertain, adversarial, private contracts. Given the
asymmetric institutional and contractual obligations of the contracting
parties, the demand for such resolutions is likely to increase, as SEP
licensors can demand no more, and SEP licensees can do no worse,
than “FRAND terms and conditions” – however defined. Those
incentives often create unbridgeable, structural, differences: the
prospective licensor must match its offer to its prior agreements,
while the prospective licensee pays no penalty for insisting on terms
superior to those agreements.
The determination of a “non-discriminatory” “FRAND rate” is
complicated further by bad economic analysis, which is ubiquitous.
This analysis takes two forms: the regulatory and academic advocacy
of unproven and unmeasurable concepts like systemic hold-up, and
“ex ante prices,” which encourage de novo construction of a “FRAND
rate”; and tactical errors by experts who advocate “effective rates”
and other non-contractual parameters. Such testimony sometimes
carries undeserved weight, as when arbitrators credit it over the terms
actually negotiated by actual market participants, who – most
economists would agree – are better informed than any economist or
arbitrator. Unfortunately, distinguishing good from bad testimony
itself requires good economic training – a requirement that “economic
experts” themselves often do not meet, never mind arbitrators.
The flames of demand for arbitration have been fanned by those
who argue that the arbitration of a “FRAND rate” should be
mandatory. If only – goes the argument – the parties faced “baseball
arbitration” – under which the arbitrators choose one side’s proposal,
or the other’s, without modification – the results would converge to
the true “FRAND rate.”119 Of course, as we again have seen, the
“FRAND rate” cannot be divorced from other “FRAND terms and
conditions.” And “FRAND terms and conditions” must, by definition,
be non-discriminatory. But there is nothing about “baseball”
proposals to ensure that the proposal proffered by either party is, in
fact, non-discriminatory – even if it is otherwise “reasonable.”
Into this structural quagmire the “FRAND rate”-setter is thrust.
Other than exposing some of the analytical and empirical errors
that routinely enter into FRAND proceedings, I can recommend no
failsafe procedure for the complex process of determining “FRAND
terms and conditions.” But one sure sign that a “FRAND rate”-setter
has erred along the way is that she crafts a set of terms that will be
uniformly chosen by the licensor’s subsequent licensees in later
proceedings. Such an agreement is said to “dominate” the licensor’s
existing agreements, and so must – by definition – discriminate
relative to them. In other words, the arbitrator must subject her
determination to the discipline of subsequent review, by courts or
other arbitrators, with an eye to not creating “dominant” terms and
thus avoiding the “downward ‘non-discriminatory’ spiral.” When the
“FRAND rate”-setter effects, rather than prevents, discrimination in
favor of one party, she not only amplifies systemic weaknesses, but
she needlessly (and permanently) hinders the licensor, future
licensees, and future arbitrators, from reaching a just, consistent and
non-discriminatory result. By definition, such arbitrated terms and
conditions are not FRAND.
119. See Lemley & Shapiro, supra note 2, at 1144.
9. See generally Mark Lemley, Intellectual Property Rights and Standard-Setting Organizations , 90 CALIF. L. REV. 1889 ( 2002 ).
10. See , e.g., Varian, supra note 4.
11. See generally Steven Berry, James Levinsohn and Ariel Pakes , Automobile Prices in Market Equilibrium, 63 ECONOMETRICA 841 ( 1995 ).
12. See ETSI Guide on Intellectual Property Rights (IPRS) , EUR. TELECOMM. STANDARDS INS ., http://www.etsi.org/images/files/IPR/etsi -guide-on-ipr .pdf [https://perma.cc/ S2PG-BZ29] (last visited January 24, 2018 ) (“Specific licensing terms and negotiations are commercial issues between the companies and shall not be addressed within ETSI . Technical Bodies are not the appropriate place to discuss IPR Issues . Technical Bodies do not have the competence to deal with commercial issues. Members attending ETSI Technical Bodies are often technical experts who do not have legal or business responsibilities with regard to licensing issues. Discussion on licensing issues among competitors in a standards making process can significantly complicate, delay or derail this process .”).
21. The ETSI undertaking is exemplary: To the extent that the IPR(s) disclosed in the attached IPR Information Statement Annex are or become, and remain ESSENTIAL in respect of the ETSI Work Item, STANDARD and/or TECHNICAL SPECIFICATION identified in the attached IPR Information Statement Annex, the Declarant and/or its AFFILIATES are (1) prepared to grant irrevocable licenses under this/these IPR(s) on terms and conditions which are in accordance with Clause 6.1 of the ETSI IPR Policy . See ETSI Guide on Intellectual Property Rights (IPRS) , supra note 12 . Other SDOs omit “fair” as a requirement, though I am aware of no rate-setting decision that has turned on this distinction.
22. See id. at “IPR Information Statement and Licensing Declaration” (“In accordance with Clause 4.1 of the ETSI IPR Policy the Declarant and/or its AFFILIATES hereby informs ETSI that it is the Declarant's and/or its AFFILIATES' present belief that the IPR(s) disclosed in the attached IPR Information Statement Annex may be or may become ESSENTIAL…).
23. Id .
24. See , e.g., Policy Statement on Remedies For Standards-Essential Patents Subject to Voluntary F/RAND Commitments, U.S. DEP'T OF JUST . (Jan. 8 , 2013 ), http://www.justice.gov/atr/public/guidelines/290994.pdf [https://perma.cc/R8VP-6WQA].
33. See , e.g., Letter from B .J. Watrous to Telecom Regulatory Authority of India,. (Nov. 10 , 2017 ), http://www.trai.gov.in/sites/default/files/Apple_%20Inc_ CP_PLTEM .pdf [https://perma.cc/8KLK-VNYQ] (“What does not work in practice are [average sales price]- or use-based methodologies for determining FRAND royalties”).
34. Id .
35. Id .
36. See id.
37. See id.
38. Ian Morris , Apple Has Sold 1.2 Billion iPhones Worth $738 Billion In 10 Years , FORBES (June 29, 2017 ), https://www.forbes.com/sites/ianmorris/2017/06/29/apple-has-sold1-2 -billion-iphones- worth- 738 - billion-in-10-years/ [https://perma.cc/W4MD-LGQ3]
39. See Lemley & Shapiro, supra note 2 (arguing that arbitration of FRAND terms and conditions is not only advisable, but should be made mandatory by the SDO) . But see Pierre Larouche , Jorge Padilla and Richard S. Taffet, Settling FRAND Disputes: Is Mandatory Arbitration a Reasonable and Non-Discriminatory Alternative?, 10 J. COMPETITION L. ECON . 581 , 581 ( 2014 ) (coming up with an opposite holding ).
83. The U.S. Supreme Court has defined “fair market value” as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” See United States v . Cartwright , 411 U.S. 546 , 550 ( 1973 ) (observing that “[t]he willing buyerwilling seller test of fair market value is nearly as old as the federal income, estate, and gifts taxes themselves .”).
Fair market value is, in other words, the price observed in a (1) voluntary, (2) informed, (3) arm's length (4) exchange. Accounting and financial standards rely on the same principles, as does the U.S. Treasury . See Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 157 40 - 45 ( 2006 ) ; Rev . Rul. 59 - 60 , 1959 -1 C.B. 237 ( 1959 ) (adopting Cartwright verbatim ); Treas. Reg. § 20 . 2031 - 1 (b) ( 1965 ).
84. See Certain Wireless Devices With 3G Capabilities, Inv . No. 337 -TA- 800 (June 28, 2013 ) (Public Version) .
85. Id . at 432 (internal citations omitted).
91. See generally TCL Communication Technology Holdings , Ltd. v. Telefonaktiebolaget LM Ericsson , No. SAVC 14 - 00341 JVS , (C.D. Cal . 2017 ); In re Innovatio, 921 F. Supp . 2d 903 (N.D. Ill . 2013 ).