FRAND patents

As I have mentioned earlier, patents are business, and below I will describe one business model related to patents that is common in the area of wireless communication such as 2G,3G,4G and the forthcoming 5G standard. i.e. patent areas in which I have been heavily involved.

Let’s say that a company has invested money for research and development and comes up with a new technology that may fit into a certain technical standard such as the 3GPP standard (the organization developing the cellular communication standards, such as 4G-LTE, or 5G-NR). In order to propose the solution to the standard, operating according to FRAND principle, the company has to agree to license the patent according to FRAND- fair, reasonable, and non-discriminatory terms. FRAND  denotes a voluntary licensing commitment that standards organizations often request from the owner of a patent that is essential to practice a technical standard.

Fair relates mainly to the underlying licensing terms. Fair terms means terms which are not anti-competitive and that would not be considered unlawful if imposed by a dominant firm in their relative market.

Reasonable refers mainly to the licensing rates. According to some, a reasonable licensing rate is a rate charged on licenses which would not result in an unreasonable aggregate rate if all licensees were charged a similar rate. A pragmatic way to see it; The total licensing cost for all licensees related to the FRAND agreement should not be more than a single digit percentage (<10%) of the products sell price. However, the exact value is negotiable between the licenser and the licensee, but this “total below 10%” gives the order of magnitude of the licensing cost.

Non-discriminatory relates to both the terms and the rates included in licensing agreements. As the name suggests this commitment requires that licensors treat each individual licensee in a similar manner. This does not mean that the rates and payment terms can’t change dependent on the volume and creditworthiness of the licensee. However it does mean that the underlying licensing condition included in a licensing agreement must be the same regardless of the licensee. This obligation is included in order to maintain a level playing field with respect to existing competitors and to ensure that potential new entrants are free to enter the market on the same basis.

This way of licensing patents according to FRAND gives the licenser possibilities to get the technology into the standard and by that get a reasonable return on investment for the development  of the technology, from those doing products compliant with standard, and at the same time the licensee get rights, for a reasonable cost, to a technology that it has not invested money on for its development.

Hence a win-win scenario.


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