les Nouvelles - September 2008

“FRAND” Undertakings In Standardization — A Business Perspective

Timo Ruikka

Strategy Advisor, IPR Intellectual Property, Nokia Corp., Espoo, Finland

This paper discusses the business reasoning for the practice whereby standard development organizations (SDOs) require undertakings to license Essential patents on fair reasonable and nondiscriminatory terms (FRAND undertakings) as a condition of approving standard specifications. The central business reason for this practice is for the stakeholders to avoid excessive royalty costs that would be possible due to patent holder bargaining power when negotiations are conducted ex post standardization and ex post implementer investment.

This paper proposes an ex ante investment analysis (not to be confused with ex ante declaration of licensing terms) and a top down approach for determining reasonable royalties. In order for implementers to determine whether royalties would make it economic to invest in implementations, it is necessary for them to evaluate the total cost of licenses for use of all Essential patents, against their business case in investing to standard implementations. It is argued that licensors should base their offered rates as a justified proportion of such total cost. To improve the predictability of licensing outcomes at FRAND rates, it is recommended to SDOs to expressly require application of the principle of aggregate reasonable terms (ART) and the principle of proportionality.

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