A Simple Approach to Setting Reasonable Royalties for Standard-Essential Patents

Intellectual Property and Patents

Article Snapshot


Mark Lemley and Carl Shapiro


Stanford Public Law Working Paper No. 2243026, 2013


This article suggests binding arbitration as a way to resolve disputes arising within standard-setting organizations.

Policy Relevance

The high cost of litigating over fair and reasonable terms has diminished the value of standard-setting organizations. By requiring binding arbitration, the cost of litigating can be diminished without increasing the burden placed on the organizations themselves.

Main Points

  • Standard-Setting Organizations (SSOs) are groups of competitors who voluntarily come together in order to establish technical standards that are then binding on the whole group. The standards that SSOs establish can greatly facilitate competition and innovation.
  • Most SSOs require members to commit to license any standard-essential patent on fair, reasonable, and non-discriminatory terms (FRAND). Such commitments serve two purposes:
    • First, FRAND terms promote the standards set by the SSO by assuring companies implementing the standard that they will be able to license patents containing material that is necessary in order to meet the standard and enter the market competitively.
    • Second, these terms provide a reasonable reward to companies who invested in innovative products that are now successfully patented.
  • While the goal of SSOs is cooperation, at times members disagree about the proper rate of FRAND terms, and, as a result, the courts have been called upon with increasing frequency to set these fair and reasonable terms. Using the courts to set these terms is inefficient and expensive.
  • The high rates of litigation are undermining the effectiveness of FRAND agreements within SSOs. Because many of these cases arise from inadequate systems set up by the SSOs, the best solution is for SSOs to implement better practices.
  • Members of SSOs, when creating or entering into new standards, should create portfolios of the standard-essential patents, and continue to require licensing on FRAND terms. However, unlike the current regimes, members should agree that the royalty rate will be determined through binding arbitration when parties disagree.
  • This solution accounts for disputes between members of SSOs and substantially reduces costs of litigation. In addition, requiring arbitration also prevents SSOs from trying to determine what is reasonable under a FRAND agreement, which in the past has been difficult and time consuming.


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