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IS FRAND IPR SCHEME REALLY FAIR?

A major challenge of the FRAND IPR scheme relies in concepts related to subjective judgment that may lead to legal disputes. For example, there is no clear consensus on what is the real (I would say even, standard) definition of “fair”, “reasonable” and “non-discriminatory” terms:

  • Fair is related to the licensing terms. These should not be anti-competitive nor would be considered unlawful if imposed by a dominant firm in their relative market.
  • Reasonable is related to the licensing rates.
  • Non-discriminatory relates to both the terms and the rates, requiring similar treatment for each licensee.

There are differences in the policies adopted by several SSOs working in these fields: for example the vast majority of standards recognised by the Organisation for the Advancement of Structured Information Standards (OASIS) requires royalty free terms and although the option of FRAND is included in their policy, OASIS recognises its trend towards royalty-free standards. The Internet Engineering Task Force (IETF) discourages encumbered patent standards in the general instructions to their working groups and the W3C requires any Standard Essential Patents (SEP) to be licenced to everyone on royalty free basis.

SEP and FRAND emanated from telecommunications sector and through traditional SSOs, while software, internet and web standards have developed in a more collaborative way, i.e. through fora and consortia.

This difference has to be taken into account while regulating the work of SSOs. Applying the model that has been developed for one sector to another, which has practically and historically developed in a different way, can lead to consequences opposite to the aim of standardisation. As such, the approach of ‘one size fits all’ is hard to enforce and can even block the standardisation process rather than being an enabler.

One avenue for a better approach to complement the FRAND scheme would be to evaluate the “strength” of each of the Standard Essential Patents brought to the technical committees.

Indeed, for instance, a core patent that still has 15 years of validity or a peripheral patent with only 5 years of validity are not carrying the same intrinsic value. Some sort of measurement shall be in place to equilibrate the “forces”, similar to the approach described in the article making a parallel between the game of Go and corporate strategy.

How to “evaluate” a patent?

Each invention has its price, which generally depends on the following five factors:

  • The importance of the patent: Revolutionary patents, which explore entirely new areas of technology, or are the first to address long-standing problems, are the most valuable. Examples of these patents include Thomas Edison’s incandescent lamp or the Benz car engine. In such cases, patents are so new that they provide their owner with a total industrial monopoly, and their value can reach billions of dollars. Although most patents never reach such high levels, they are nevertheless valuable in that they can force a competitor to seek innovation in order to keep pace with new or improved technologies and products entering the market or, failing that, to seek a licence from the patent holder, provided that the latter agrees to grant it. Patents that make only slight improvements to existing products are generally the least valuable, although this is not always the case. When you try to give it a price, the question that often arises about a patent, whether it is revolutionary or only a slight improvement to an existing product, is this: “How much would my competitors be willing to pay to use my protected product or process?”
  • The market: The size of the market, the number of items to be manufactured and the cost of each item also have a significant impact on the value of a patent. What sales volume is the patent likely to generate, and for how long? The Intel® microprocessor, with an estimated market value of several billion dollars, is a good example of this type of item.
  • The term of validity of patents:Patents have a maximum validity period of 20 years, which is practically a monopoly of 20 years. Patents that are at the beginning of their term of validity and that are likely to retain their virtual monopoly position for a longer period of time are logically more valuable. It is rare for a patent that is nearing the end of its term of validity to pose a serious threat to its competitors. It is almost certain that at this stage, they will have developed a technology or product that will not come up against the monopoly situation of the patent holders. In addition, account must be taken of the potential commercial life of a patent, i.e. the period during which the patent is likely to be economically useful, in the event that subsequent patents offer better solutions than the one it proposes.
  • Quantity of prior inventions of the same type: The number of documents cited or patented products present in an innovation field also has an effect on the value of a patent. In general, if the invented article is only one of many items of the same kind, consumers are spoilt for choice and the value of each patent in this particular field is relatively less valuable than a patent of a unique kind in the eyes of customers.
  • The importance of the patent: Each patent has its own importance in a particular field and is generally part of an overall intellectual property strategy aimed at maximizing its potential gains or allowing other patents to maximize theirs. Patents of this type are those used to prevent other players from entering the market. Still others are in addition to an original patent and rely on the protection afforded by it to break through. It is not uncommon for pharmaceutical or telecommunications companies to file new patents to protect strong first-generation patents, in order to secure a large market share and to be able to negotiate licensing and royalties on protected but highly sought-after technology.

There are different methodologies and tools (commercial solutions) to perform such evaluations.

SDO’s shall adopt and enforce a methodology that would support a more applicable IPR scheme based on a generic FRAND scheme.

What do you think?

Stéphane Amarger

Innovator by nature...

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