The BERO Group Publications

What is FRAND and how does it impact patent damages?

By James L. McGovern, CPA/CFF, CVA, Fellow
September 2014

For those involved with Standards Essential Patents (SEP), FRAND is a familiar acronym that stands for Fair, Reasonable, and Non-Discriminatory and is a patent licensing obligation required by standard-setting organizations.

Breaking it down:

Fair refers to the underlying licensing terms, terms that are competitive and legal in the marketplace.

Reasonable refers primarily to the licensing rate.

Non-Discriminatory refers to both the terms and the rates in the agreement. The licensor must treat each individual licensee the same in order to maintain a level playing field and ensure new products are able to enter the market on the same footing.

FRAND, then, requires that holders of essential patents do not discriminate and do not restrict competition, thus encouraging inventors to continue to research and develop new processes and technologies.

SEPs are patents that evolve out of standards established by various industries. Take, for example, the technology surrounding 4G mobile telecommunications. The telecommunications industry sets a standard for 4G, and dozens of companies have patents on some part of that standard. In order to be part of that standard an individual company must agree to put their product or process into the standards pool and then be willing to license it on fair, reasonable, and non-discriminatory (FRAND) terms.

But what, exactly, is fair? In the case of Microsoft Corp. v. Motorola, Inc.(No. C10-1823JLR, 2013 WL2111217 (W.D. Wash. Apr. 25, 2013), an epic 207-page decision essentially awarded Motorola less than one-twentieth of a percent of the damages they were seeking, primarily because the judge found that the patent holder of the wi-fi chipsets were not able to convince him that the royalty should be based on the end product.

It's important to point out that infringement damages for patents covered by FRAND are, by definition, limited, unlike non-FRAND cases. One trade-off of being part of the SEP is consenting that others use your patent in exchange for a fair and reasonable royalty, so you essentially surrender any competitive edge you have as the patent owner. In non-FRAND cases, the holder hasn't surrendered that right and a reasonable royalty would be much closer to what a willing licensor would receive on the open market.

Infringement damages in FRAND cases is a relatively new area of the law and the Microsoft case as well as the subsequent Innovatio v Cisco case (In re Innovatio IP Ventures, LLC Patent Litig., No. 11 C 9308, 2013 WL 5593609 (N.D. Ill. Oct. 3, 2013) appear to provide important insight into critical issues courts will consider when addressing reasonable royalties in FRAND cases.

In both cases, the Courts found that it was inappropriate to seek excessive royalties from companies that must use the patents because they are part of a standard, a practice commonly referred to as "patent holdup". Likewise both Courts addressed "royalty stacking" or cumulative demands of patent holders across the relevant technology or the device that threaten to make it economically unviable to offer the product. Royalty stacking is a concern when setting a FRAND rate to ensure that the asserted patents are not overvalued compared to the technological contribution they make to the standard. Thus, it appears that the courts will consider royalty stacking as a way of checking the accuracy of a proposed FRAND royalty's correspondence to the technical value of the patented invention.

As more FRAND cases are litigated and various royalty calculations are considered, the courts are sure to provide further definition and guidance to help with this evolving and complex issue.