Negotiating FRAND Licenses in Good Faith

This article has two messages. First, any set of principles for defining whether a fair, reasonable, and nondiscriminatory (FRAND) negotiation has transpired in good faith must identify what economists who work on questions of market design call activity rules and closing rules. Judges, practicing lawyers, legal scholars, and government officials working on the defining of principles for good-faith negotiation of FRAND licenses for standard-essential patents (SEPs) have not recognized that need. Nor, to my knowledge, has any academic economist or expert economic witness commented on this lacuna.

Second, the American jurisprudence on offer, acceptance, and contract formation fortuitously has the clarity of an unambiguous closing rule, but the contract jurisprudence of other nations appears, at least to my American eyes, to be less clear. In my experience, the potential for there to be material variation across jurisdictions in the level of ambiguity of the legal principles for determining whether an SEP holder and an implementer have conducted their FRAND negotiation in good faith has received virtually no attention from judges, practicing lawyers, legal scholars, and government officials. And, to my knowledge, this issue has received absolutely no consideration from academic economists or expert economic witnesses testifying in FRAND disputes.

This phenomenon of differential ambiguity in matters of contract formation and good-faith negotiation has important practical implications because French law, which appears to be less emphatic than American law on such questions, often is the controlling law for interpreting the duties imposed by a FRAND contract because the European Telecommunications Standards Institute (ETSI) is so prominent in the setting of voluntary standards for wireless communication, and ETSI’s FRAND contract prescribes that French law controls. In contrast, New York law controls the Institute of Electrical and Electronics Engineers’ (IEEE’s) reasonable and nondiscriminatory (RAND) contract. Those legal differences in turn could influence the content and evidentiary relevance of expert testimony on questions of economic fact, such as the quantification of a FRAND or RAND royalty.

To begin the task of reducing legal and economic ambiguity concerning the determination of whether an SEP holder and an implementer have conducted a FRAND licensing negotiation in good faith, I have proposed here the formulation of a specific activity rule and a specific closing rule when American contract jurisprudence does not control interpretation of the FRAND contract in question. My proposed activity rule is that, in each round of offer and counteroffer—and to the extent that the SEP holder has not already discharged its contractual obligation to ETSI (such as by already having made a legitimately FRAND offer at the very outset of the negotiation)—a party must revise its bid or ask price by the minimum agreed-upon increment for that party to be deemed still to be negotiating in good faith. My proposed closing rule is that a party will be deemed to have made its final offer or counteroffer if it does not, within a commercially reasonable amount of time after receiving an offer or counteroffer, sweeten its price relative to its price in the previous round of offer and counteroffer. These rules of market design are proposals, which will surely benefit from scrutiny and refinement by others, but these proposals should suffice to invite a needed discussion.

Finally, because ETSI’s FRAND contract contains the distinctive (but evidently ambiguous) requirement that an SEP holder be “prepared to grant” licenses to its SEPs, I offer here one particular interpretation of that phrase that is explicitly informed by the economic analysis of law. Whether a court would find my suggested interpretation compatible with the principles of interpretation used in French contract law is a question I must leave to others better suited to the task.

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