December 2015

ISBN: 978-3-945185-04-9

IPR Policy as Strategy
The Battle to Define the Meaning of FRAND
Bowman Heiden
Center for Intellectual Property (CIP)
Department of Technology Managementand Economics
Chalmers University of Technology

IPR Policy as Strategy
The Battle to Define the Meaning of FRAND
Bowman Heiden
Center for Intellectual Property (CIP)
Department of Technology Management and Economics
Chalmers University of Technology

1.

Introduction

The value of patents affects the performance of firms and the structure of markets,
which in turn impacts the dynamic and static efficiency of the economy. Thus any
discussion that impacts the value of patents through legislative reform, new judicial
norms, or other regulatory or contractual regimes will have a systemic effect on theeconomy and thus must be informed by an understanding of the empirical evidence,the potential theoretical consequences of change, and the self-assertive interests ofthe parties that are lobbying for change. Without this holistic evaluation we arelikely to initiate change that creates greater inequities, potentially lowering insteadof raising aggregate social welfare.
One of the most high-stakes arenas where strong business interests are currently
debating and defining the value of patents is within the telecommunication industry.
While much of the attention in the popular press has focused on the smart phone
war between Apple and Samsung, which is a relatively traditional industrial battle
over competing products, a potentially more important intellectual property battle
concerning the future of telecommunications in the knowledge economy has beenensuing in parallel. This is not a conventional battle over the market share ofproducts between horizontal competitors on product markets, but a battle amongvertical collaborators over the appropriation of value between upstream technology
owners and downstream product implementers. As such, the current conflict in thecontext of telecommunication standards is part of a wider paradigm shift from anindustrial to a knowledge economy characterized by an increasing number of actorsthat commercialize knowledge through intellectual property based business models.
Thus market conflicts between vertical actors over royalties regarding technology
standards can carry a greater systemic impact as it questions the viability of a newdivision of innovative labor in the economy.
This study addresses the ongoing battle to define the meaning of F/RAND as a key
institution in determining the value of standard essential patents (SEPs) and thetransformation of the telecommunication industry in the emerging knowledge
economy. In particular, this study investigates the social construction of F/RAND andSEP value by deconstructing the key concepts and self-assertive interests of industry
actors that have formed the basis for recent judicial, regulatory, and policy decisions.
The primary goal is to unveil the normative game whereby actors seek to define
reality from the perspective of their own self-interest, whether economic orideological, in hopes that this will facilitate more objective research and more
effective decision-making by standard-setting organizations, courts, competition
authorities, and legislators. The full paper will be available in an academic journal in
the near future. Below is a short summary of the preliminary findings.

2.

Preliminary findings•

Self-Interest and Heterogeneity in the Telecommunication Value Chain
The telecommunication industry operates in a fragmented value chain where
heterogeneous actors operate with both industrial and knowledge-based
business models, and competition is conducted on both the technology andproduct market. This has resulted in that SEPs play a strategic role indetermining bargaining power in vertical relationships as well as competitive
advantage in horizontal relationships. A specific firms’ view on F/RAND isaligned not with the position in the value chain, but instead depends on thetype of business model and the relative strength of the SEP portfolio inrelation to specific competitive relationships (e.g. not every chipmaker orend product supplier has the same view on F/RAND). The evidence suggeststhat as the competitive environment and strategy of firms change, so does
their viewpoint on the definition of F/RAND and the value of SEPs.

•The Social Construction of F/RAND
The history of F/RAND in the telecommunication industry can be dated backto the 1956 AT&T consent decree. While, in this instance, F/RAND was seen
as a remedy to facilitate technology access, there is now considerably
disagreement as to whether F/RAND is institutionally sufficient to regulate
license agreements in the telecommunication industry without anticompetitive effects. This has generated a rather intense battle over themeaning of F/RAND among market actors with divergent views. While there
is general agreement that F/RAND should regulate both access to technology
and incentives to innovate, there is a large disagreement (e.g. between 1-2
orders of magnitude) over what constitutes a F/RAND royalty rate. Relatively
new concepts, such as royalty stacking and ex ante valuation have emerged
together with new arguments related to well-known concepts such asinjunction and royalty base. However, by far the most important issue relates
to the social construction of the concept of patent holdup, especially thedistinction between its contractual and antitrust dimensions. Despite themarket success of F/RAND-enabled standards and the 2006 eBay ruling
limiting injunctions, the use of the concept of patent holdup still remains at
the core of the argumentation in defining the meaning of F/RAND in 2015.

•Legitimizing Arenas and the Communicative Game
Self-interests and normative concepts are not sufficient in of themselves todefine the meaning of F/RAND without communicative actions onlegitimizing arenas. This primarily includes influencing IPR policies in SSOs,filing amicus briefs and strategic use of litigation in the courts, filingcomplaints at the FTC and ITC, and participation in DOJ, FTC, andCongressional hearings. Additionally, indirect influence through academic
research and media sources also impacts the decisions of legitimizing arenas.
These communicative actions result in court orders, enforcement actions,policy statements, business review letters, exclusion orders, IPR policies,legislation, etc. all of which combine to ultimately influence the meaning ofF/RAND in general, but more importantly impact the actual negotiation of
SEP licenses in market transactions.
While firms are expected to act in their own self-interest, the role oflegitimizing arenas is to safeguard the interests of society as a whole. Thereare clear indications that market actors are strategically looking to alter the“rules of the game” in their favor by taking an active role in influencing policydecisions regarding F/RAND and the value of SEPs. Thus there is a genuine
concern that strong financial interests can unduly affect the framework uponwhich open standards are developed and commercialized. By mapping theself-interests, the origin and use of normative concepts, and thecommunicative actions, actors on legitimizing arenas will be better able todeconstruct and understand the validity of the complex argumentation andevidence put before them and make better informed, systemic decisions.