What is Fair and Reasonable? Determining Frand Royalties: The Difficult Tasks of Courts and Arbiters in the Smartphone Patent War. An Arbitration Proposal

Posted by Social Science Research Network

What is Fair and Reasonable? Determining Frand Royalties: The Difficult Tasks of Courts and Arbiters in the Smartphone Patent War. An Arbitration Proposal Alberto Garcia Lopez

Abstract: This work analyses the positive effect that the patent system, in coordination with antitrust laws, has on the creation of social welfare by means of promoting dynamic competition among innovators. However, the same system is also capable of creating situations in which the entire innovation process is hindered, like when a single patent acts as an effective barrier to enter into a specific market, or the more complex situation known as ‘patent thicket’.

While the remedy for the first problem is the compulsory licenses granted by governments, the second can be solved with the creation of patent pools, a solution first envisaged in 1856 in relation to the sewing machine without governmental intervention. The perception of patent pools has varied significantly throughout history, being nowadays seen as a strong pro-competitive mechanism encouraged by antitrust authorities if they are structured to meet certain requirements designed to prevent abuses.

Patent pools also facilitate the adoption of ‘technical standards’: agreements by whole industries to follow common technical specifications necessary for the manufacture of devices that work in networks and need to interoperate with each other. Standards are promoted by standard setting organisations (SSO), which provide the forum where the negotiations for their adoption take place. The patents covering a standard become ‘essential’ for the industry placing their holders in a dominant position because all manufacturers are bound to use the technical teaching they protect. To avoid abuses, SSO require that standard essential patent (SEP) holders make a binding commitment to grant licences in fair, reasonable, and non-discriminatory (FRAND) terms to all third parties.

These conditions are determined through negotiations that take place in a very specific scenario, since the implementers of a technical standard need to obtain authorisations from all SEP holders (since there are no technical alternatives to be used), and the SEP holders cannot refuse granting licenses on fair and reasonable terms due to their previous commitment. In these circumstances, the use of prohibitive injunctions by SEP holders on an implementer acting in good faith should be restricted to prevent their influencing the outcome.

When an agreement is not possible, the parties can always refer to courts to determine what FRAND conditions are. Another option is relaying on alternative dispute resolution (ADR) systems. If arbitration mechanisms designed to balance the interest of both parties were incorporated in the FRAND commitment, the use of standards could be further promoted, helping to improve situations of massive litigation like the one that it is currently known as the ‘Smartphone patent war’.