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

Article Source: Stanford Public Law Working Paper No. 2243026, 2013
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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.


Key Takeaways:
  • 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.



Carl Shapiro

About Carl Shapiro

Carl Shapiro is the Transamerica Professor of Business Strategy at the Haas School of Business, and Professor of Economics in the Economics Department, at the University of California at Berkeley. His current research interests include antitrust economics, intellectual property and licensing, patent policy, product standards and compatibility, and the economics of networks and interconnection.

Mark Lemley

About Mark Lemley

Mark Lemley is the William H. Neukom Professor of Law at Stanford Law School and the Director of the Stanford Program in Law, Science and Technology. He is also a Senior Fellow at the Stanford Institute for Economic Policy Research and as affiliated faculty in the Symbolic Systems program. He teaches intellectual property, patent law, trademark law, antitrust, the law of robotics and AI, video game law, and remedies.