New Thinking on Fair, Reasonable and Non-Discriminatory Terms Arbitration


The rules of standards setting bodies often require patent owners who participate in standards setting activities to declare their patents that are essential to the standard and to agree to license those patents to implementers of the standard on reasonable and non-discriminatory terms or fair, reasonable and non-discriminatory terms (for this article, collectively “FRAND terms”). FRAND licensing is complicated because many thousands of patents owned by multiple parties may cover a standard and an individual licensor may be seeking a royalty for a portfolio of tens or hundreds of patents.

On both sides of the Atlantic, as well as in China, an agreement to arbitrate FRAND disputes has formed part of settlements between antitrust authorities and licensors of patents subject to FRAND obligations that were accused of asserting those patents in violation of applicable antitrust or competition law. In addition, commentators have proposed arbitration as an ideal way of resolving disputes in one forum that may involve patents in many countries, as well as the multiple issues that may form part of a FRAND dispute. These issues may include whether or not patents the patents asserted are in fact essential to the standard, whether the patents are infringed by the defendant, whether the patents are valid and enforceable and the amount of royalties due, including the percentage royalty rate and the applicable royalty base (a currently contentious issue), as well as what factors may be taken into account in arriving at the applicable royalty rate.

The World Intellectual Property Organization (WIPO) has issued arbitration rules for FRAND arbitrations. However, these rules are by design general in nature and leave the parties (and the arbitral panel) free to determine the applicable procedure and the nature of the issues to be resolved.
At a recent seminar organized by WIPO in Palo Alto in November of last year, there was spirited debate on exactly how a FRAND arbitration should proceed. In particular there was discussion whether an arbitration procedure covering large portfolios should mimic the approach of courts where due to the practical limitations of court litigation, small numbers of patents are litigated and FRAND negotiations between the parties affected by whether or not those small numbers of patents are found valid, essential and infringed. The “quality” of the entire portfolio may be extrapolated from the sample patents litigated. Other contentious issues included the extent to which a portfolio held by one licensor should be viewed in the context of all the patents relevant to a standard, and the extent to which actual royalties paid by third parties are the most probative evidence of what is a FRAND royalty.

As noted above, arbitration has been proposed to resolve FRAND disputes because it is regarded as better able than litigation in multiple countries to resolve the international and multi-faceted issues posed by such disputes.

However, potential parties to arbitration are rightly concerned that in some situations, how the issues are framed and addressed may affect the outcome between the parties. Rather than such concerns acting as a barrier to arbitration or other ADR procedures, it would surely be more productive to bring together both contributors to standards and implementers of those standards to explore potential arbitration and other ADR approaches so that at a minimum, all parties are better educated as to the concerns of those on the other side of the table. A more ambitious goal would be to develop some suggested common approaches that may be of use both to parties and arbitrators working together to create a fair and reasonable arbitration or other ADR procedure to resolve a particular FRAND dispute. Please let me know if you are interested in working with me to put together such a proposal, or if you are already involved in, or know of, such a project organized by another group. Many thanks.

Stephen Johnson is the author of The Economist Guide to Intellectual Property, published in 2015, and also in 2015 was listed in Intellectual Asset Management Magazine’s IAM Strategy 300 list of the world’s leading IP strategists. He is based in San Francisco and can be reached at stephenphjohnson@gmail.com.