FRAND: telecoms and car companies reveal what they consider to be fair
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FRAND: telecoms and car companies reveal what they consider to be fair

Sources from Nokia, an automotive manufacturer and two telecoms companies debate matters of transparency and fairness and whether or not lower royalties frustrate standards innovation

With the UK Supreme Court set to consider whether global licences can be FRAND in Unwired Planet v Huawei next month, car and telecoms companies explain what they think fair, reasonable and non-discriminatory should mean; with concerns and responses falling predictably between the licensee and licensor camps. 

Speaking to Patent Strategy, in-house sources gave several examples of disagreement points that typically surface during negotiations, and that can muddle ideas of what fair, reasonable and non-discriminatory (FRAND) rates should be for a particular technology.

The same chip inserted into a smart vending machine and an autonomous vehicle, after all, could be licensed at the same rate. A multinational, such as Apple, and a small garage start-up could pay the same royalty for the same piece of technology. And without a global fixed rate, one company could end up negotiating FRAND in every jurisdiction where it sells its products.

These examples, which were cited by various stakeholders, raise the point that what is fair and reasonable to one company could be seen as discrimination against another.

“What is fair and reasonable is essentially the value of the technology, which means you are reflecting what the patent portfolio is worth,” says Kerry Miller, head of IP regulatory affairs at Nokia in the Netherlands. “It has to be fair and reasonable to both parties.”

“One way to determine this is to look at the price of a product, such as an iPad, with and without cellular connectivity. That gives you an idea of the value of that connectivity technology. Another way is to look at what consumers are willing to pay for a feature.”

But what customers are willing to pay does not necessarily reflect what implementers are willing to spend, another source points out. “It’s all about value for money – that is FRAND,” says the chief IP officer for a European telecoms company. “We try to be sensitive to how the market values technology, but in the end all companies want to protect their bottom lines.”

For an implementer, protecting that bottom line means negotiating down to the lowest royalty rate possible, he adds, which might not reflect the same price that the standard essential patent (SEP) holder had in mind.

The senior licensing manager for a European car maker takes a more global view, however, and says FRAND is about more than just royalty rates. “FRAND is the total of all terms of an agreement that must be non-discriminatory and fair and reasonable. You always have to look at the financial terms during the consideration for a licence agreement,” he says.

Stepping back and considering all the factors is an essential step to finding a mutual FRAND agreement. The vice president for FRAND compliance for a European telecoms company says a good way to start the FRAND negotiation process is to begin by considering the patent’s worth.

“We look first to the economic value we have created through connectivity and try to understand that as well. Then we can talk to the other party and make sure assumptions are right and that we understand each contributor,” he says.

Arriving at the correct rate is a matter of striking the right balance. Miller at Nokia says that if the negotiated royalty rate is too high, companies won’t accept it. But if they are too low, companies won’t contribute valuable innovations to various standards.

“You want to have rates that are high enough so companies have an incentive to invest in the technology and contribute it to the standard,” he says. “Standards can’t exist if companies don’t think they will get a return on the investment needed to create the technologies.”

Same chip, different products

One source points out that a costume designer for the Royal Ballet pays the same amount for a metre of silk, whether it is used for a tutu or a grand ball gown. The material is the same, but the two costumes and the awe they inspire are not.

By the same logic, a licensee might buy a computer chip; but should the amount it pays be determined by whether or not said chip is destined for a smart vending machine or an autonomous car?

Some say, yes. “With 5G we could be talking about a vending machine out on a football field somewhere that needs to request restocking every now and then. That is a useful technology, but it is not worth all that much,” explains Miller.

“On the other hand, you can put 5G into an autonomous car and there it becomes critical to safety and provides a huge amount of value.”

“The technology provides different values in different applications and you can’t charge the same rate for both. If you charged the makers of vending machines a rate appropriate for autonomous cars, the vending machine makers could not afford the technology.”

The solution, Miller says, is to charge a rate based on the value the connectivity provides to the application.

The telecoms chief IP officer disagrees, saying that whether or not standards developing companies receive money from the royalties, they will continue to invest in innovations and set standards for technologies.

“The idea that reduced royalties will lead to a drop in innovation is a fatal misunderstanding,” he says. “Standards do exist without FRAND. Let’s assume there are no more patents for a moment; I'm very sure the standards would continue to be made.

“It is quite fundamental to human nature to innovate, and standards are needed in communication technology. It's a massive misunderstanding to think innovation will stop. The circus will be a little bit different, but innovation will continue,” he says.

One way to negotiate this point, according to the automotive senior licensing manger, is to set terms and conditions for similarly situated parties: “As an SEP owner, if you have a number of manufacturers of household appliances and the potential licensees have no SEPs, you can make an identical offer to all parties that make those products.”

He adds that an easy way to avoid arbitration or a court case is to find an acceptable rate for five or six licensees. If a company is offered the same rate as their competitors, they are more likely to accept it, even if they believe the price is a bit steep. 

Miller says there has been a lot of anxiety in recent years about possible high prices for connectivity, with patent holders charging a fixed percentage of the car price.

“That was fear mongering. When you think about it, the rate for licensing connectivity patents is around what you pay to park your car or have it washed. It is important to say these are very modest fees,” he says.

“If you look at the auto industry, they often charge customers around $2,000 for a technology package which includes cellular connectivity in a car, so $15 for a licence that covers most of the cellular patents is quite modest.”

The freedom of not being sued

Few companies voluntarily pays royalty fees. One source points out that the Apples and Ubers of the world have to negotiate a FRAND rate with patent holders or face a strong risk of a lawsuit for lack of payment.

This is not so much the case for a small garage start-up in Indiana, for example. Such a business is often small and lucky enough to fly under the radar of radar building companies.

“Patent owners have limited licensing resources and so they need to focus on the large players,” explains Miller at Nokia. Waiting for the start-up to grow in size and revenue before asking it to pay a royalty is one technique to conserve limited resources.

But what happens when the start-up grows from small to medium and begins the negotiation process? Is it non-discriminatory to charge the small company the same as the large, or is it non-discriminatory to charge them a different rate because of their smaller size?

“The topic of small companies and FRAND licensing will keep us busy for a while. How do we get a level playing field for the small companies,” asks the senior licencing manager.

A telecoms source boils down the question of royalties to very simple terms: “If you are selling a licence what you are really selling is freedom from a lawsuit. Nobody goes and asks for a licence, you have to chase people for one.”

Put in those terms, ‘fair, reasonable and non-discriminatory’ can be defined as how much avoiding litigating a lawsuit is worth to both the licence holder and implementer.

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