A FRAND Contract’s Intended Third-Party Beneficiary

J. Gregory Sidak


A patent holder that joins a standard-setting organization (SSO) typically agrees to license its standard-essential patents (SEPs) on fair, reasonable, and nondiscriminatory (FRAND) terms to future implementers of the standard. U.S. courts have found that a commitment to license SEPs on FRAND terms is a binding contract between the SEP holder and the SSO, and that, as a third-party beneficiary, an implementer of that industry standard has the right to enforce the obligations arising from that contact. However, can an implementer exhaust its rights as a third-party beneficiary? Can an implementer’s feasance or nonfeasance preclude it from enforcing its rights as a third-party beneficiary of a FRAND contract? In this article, I analyze the scope of the implementer’s rights as the intended third-party beneficiary of a FRAND contract, and I determine the circumstances in which an unlicensed implementer would exhaust those rights.

In Part I, I explain that, in the United States, a nonparty typically may enforce a contract only if the nonparty is the contract’s intended beneficiary. U.S. courts have confirmed that implementers of an industry standard are typically intended third-party beneficiaries of the FRAND contract and, consequently, that they have a right to enforce the SEP holder’s obligations arising from that contract. Because a FRAND contract typically imposes on the SEP holder a duty to offer to license its SEPs on FRAND terms before seeking to enforce those SEPs, an implementer may bring an action for breach of contract against an SEP holder that fails to perform that duty.

In Part II, I analyze the circumstances in which an implementer of an industry standard extinguishes its rights as a third-party beneficiary of the FRAND contract. The SEP holder’s offer to license its SEPs on FRAND terms confers on the implementer the power of acceptance—that is, the power to accept the FRAND offer and transform it into a binding license agreement. However, the FRAND commitment contains no guarantee that, after an SEP holder has made a FRAND offer, a license will eventuate between the SEP holder and a specific implementer. The implementer’s power to accept a FRAND offer might terminate (1) if the implementer rejects a FRAND license offer (either explicitly or by making a counteroffer), or (2) by operation of law. In particular, the implementer’s power to accept a FRAND offer terminates by operation of law if the implementer fails to respond promptly to the SEP holder’s offer. Because time is of the essence in the licensing of SEPs, an implementer may not decline to accept a FRAND offer, prolong a negotiation, and yet still retain an enforceable right pursuant to the SEP holder’s FRAND contract with the SSO. After the implementer’s power to accept a FRAND offer has terminated, an implementer has exhausted its rights as a third-party beneficiary and may not claim any further rights under the FRAND contract.

In Part III, I explain that an implementer may not use the FRAND contract to extract rights that the SEP holder and the SSO never intended to confer on a third party. As a matter of basic contract law, the FRAND contract between the SEP holder and the SSO grants no greater a bundle of rights to the implementer than what the SEP holder promised to the SSO to convey to an intended third-party beneficiary. In determining the intended scope of the implementer’s rights, a court needs to examine the exact terms of the FRAND contract between the SEP holder and the SSO. For example, in a typical FRAND contract, there is no evidence that the SSO and the SEP holder intended to give a third-party beneficiary the right to obtain an offer to license individual SEPs within the SEP holder’s portfolio. Even if a court were to determine that the terms of a FRAND contract are ambiguous with respect to the availability of à la carte licenses, extrinsic evidence surrounding the formation of that contract would support the conclusion that neither the SEP holder nor the SSO intended to confer on third parties a right to demand à la carte licenses. Because the parties to a FRAND contract never intended to offer to an implementer the right to an à la carte license, an implementer may not rely on the FRAND contract to demand the legally enforceable right to receive an offer for such a license. The implementer has only as many rights as the FRAND contract creates.

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