Is a FRAND Royalty a Point or a Range?

J. Gregory Sidak


Justice Birss said in Unwired Planet that there can be only a single FRAND royalty rate for a given set of circumstances between parties negotiating a license for an SEP. However, it would be untenable on both economic and legal grounds to infer from that opinion that FRAND or RAND can be only a single point in a voluntary negotiation between two parties, or that an SEP must command the same price across all licensees for a given SEP.

As an economic matter, an SEP holder’s commitment to license its SEPs on FRAND or RAND terms generates a range of reasonable royalties upon which the negotiating parties could voluntarily agree. The SEP holder’s minimum willingness to accept to license its SEPs and the licensee’s maximum willingness to pay to use those SEPs identify the bounds on the bargaining range. Any agreed-upon royalty within that prescribed range will make both the SEP holder and the licensee better off than they would be if they were not to execute the license. In a given negotiation, the royalty will converge on a point within that range according to the relative bargaining power of the specific negotiating parties. However, the ultimate point value of that royalty is not preordained by the supposed uniqueness of a FRAND or RAND rate; rather, the ultimate point value of the FRAND or RAND royalty in a given license depends on the circumstances surrounding the negotiation. Differences in the size of the bargaining range and differences in the relative bargaining power of the SEP holder and the implementer will surely exist across licenses for a given SEP, and those differences explain why the observed royalty rate for a given SEP routinely varies across licenses.

Legal interpretation of the FRAND or RAND commitment (under American law) independently confirms that a FRAND or RAND royalty may be situated anywhere along a range of possible outcomes. In both their interpretation of section 284 of the Patent Act and their application of the hypothetical-negotiation framework to determine damages for patent infringement under section 284, the federal courts recognize that a range of reasonable royalties exists for a given patent. Any contractual bargaining away by the patent holder of its rights arising from that statutory framework would need to be indisputably clear. However, such clarity is nonexistent. The patent policies of the major SSOs allow the SEP holder and the implementer to set licensing terms for an SEP, including the ultimate royalty rate, through voluntary, bilateral negotiation. Far from dictating a unique point value, that mechanism permits a range of FRAND or RAND royalties for a given SEP.

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