Moving Away from High-Level Theories: A Market-Driven Analysis of FRAND in the Context of Standardization

Abstract

There is a large strand of legal and economic literature suggesting the FRAND regime is broken and that standardization is at risk given “hold-up and “royalty stacking” problems. A variety of proposals have been made to address these alleged problems, most of which seeking to decrease the bargaining power of essential patent holders to the benefit of standard implementers. The hold up and royalty stacking conjectures have been questioned by a number of authors essentially on the ground that these theories contained logical inconsistencies, but also that they were not based on sufficient empirical support to warrant policy reforms. Against this background, this paper explains why hold up and royalty stacking only occur in rare circumstances given the private solutions that are available to standard implementers to avoid paying license fees that are not FRAND or that would aggregate to a level that would render the implementation of the standard more difficult or even impossible. Given the dearth of empirical evidence over hold up and royalty stacking, this paper also looks at the evolution of the mobile communication sector in the past decade to see whether the alleged adverse consequences (in terms of harm to standard implementation, innovation and investment and the continuity of the standardization process) that would be created by hold up and royalty stacking can actually be observed. The available data suggests that the mobile communication device markets are healthy despite the fact that these markets have been said to be harmed by regular SEP-related abuses. Although it could be argued that these markets would be even healthier “but for” SEP abuses, the available data should give pause to those claiming that significant reforms should be made to the FRAND regime. In fact, the high degree of competition in the above markets and the presence of highly successful entrants that do not have a track record in the development of mobile communication technologies strongly suggest that the FRAND regime has largely worked in that it has stimulated the broad licensing of SEPs while maintaining a fair balance between the interests of SEP holders and standard implementers.

Keywords: standardization, FRAND, hold up, royalty stacking, mobile communication, cross-licensing, empirical evidence

JEL Classification: K11, K21, K40, L40, L96