The recent decisions in Apple v. Motorola, Microsoft v. Motorola, In re Innovatio, and Ericsson v. D-Link have offered much-needed guidance on U.S. courts’ interpretation of what constitutes FRAND licensing terms in the standard-setting context. In this article, we discuss the implications of these rulings from the perspective of economics and public policy. The courts have generally relied on modified versions of the criteria used in determining reasonable-royalty patent-infringement damages. Whereas some of these proposed modifications are sensible in our view, others are inconsistent with generally accepted economic principles and are likely to have an adverse effect on incentives to innovate. Some key economic lessons (not all, unfortunately, acknowledged by the courts) are the following.

First, there is no such thing as “the value of the patent itself” independent of context. The “same” patent can command different royalties (and possibly different royalty structures) in different contexts and for different applications.

Second, by participating in the collaborative standards-setting process and making their technology available for use in making standards-compliant products, patent holders have contributed more than simply the ex ante value of their technology. Patent holders should be entitled to seek a “fair share” of the gains associated with standardization without being accused of
engaging in “holdup.”

Third, a policy that restricts holders of SEPs to only receiving the “inherent value” of their technology and that gives them none of the value associated with the standardization process would be inherently biased against innovators and in favor of implementers.

Fourth, there is no basis for concluding that the “incremental value approach” is part of what SSOs consider FRAND.

Fifth, while FRAND requires that similarly situated licensees be treated similarly, it does not follow that a FRAND royalty must be the same at all levels of the value chain. In other words, FRAND royalties may be percentage-based and vary with the selling price of the licensed products.