FRAND Holes


Munchkins

FRAND holes. This isn’t a new offering from Dunkin Donuts. They’re the holes in the rules for licensing what are called standard-essential patents (SEPs).
Earlier this month, the South Korean Fair Trade Commission fined Qualcomm Inc. $853 million and Apple Inc. filed an antitrust complaint against Nokia Corp. FRAND holes play a part in both these actions.
FRAND stands for “fair, reasonable and non-discriminatory.” This becomes an issue when a company has to infringe someone else’s patent in order to comply with a technology standard. Usually, to get its technology into the standard, a patent owner has to promise the standards-setting organization that companies that want to comply with the standard can get patent licenses on FRAND terms.
But that doesn’t mean that every licensee is going to pay exactly the same royalties. The standards organization asks only that the patent owner be FRAND-ly with each individual standard user and prospective licensee. That allows for such things as volume discounts. So asking smaller licensors to pay a higher royalty per unit sold than bigger licensors doesn’t necessarily violate the FRAND commitment.
FRAND hole #1
Should FRAND mean no product ties? Qualcomm’s SEPs cover chips it makes. According to the South Korean antitrust regulator, Qualcomm discounts the royalty if companies buy its chips, but makes it expensive or prohibitive to license the technology to make competing chips.
FRAND hole #2
Should FRAND mean one standard, one company’s portfolio of SEPs and one negotiated license? Standards bodies have worried about excessive FRAND demands for a portfolio containing a mix of SEPs and non-SEPs—a hole the IEEE tried to plug in February 2015—but this is different. Standards bodies are also worried about stacking—when two companies have SEPs underlying the same standard.
Apple’s complaint is about when the original single-company owner of a SEP-only portfolio splits the portfolio.
Nokia was granted a passel of SEPs underlying various wireless standards. When it decided to quit making phones it distributed some—but not all—of its SEPs to Acacia Research Corp. and Conversant Intellectual Property Management Inc. Phone makers like Apple now need to go to multiple companies to license the multiple SEPs for the same standard for a sum greater than Nokia would have gotten for the portfolio as a block, Apple says.
FRAND hole #3
Can subsequently issued patents get a patent owner extra royalties? Nokia had patent applications in the queue. When they were granted, they became additional SEPs underlying a standard that hadn’t changed. Apple claims Nokia moved them to Acacia, and Acacia treated them as new SEPs with a new license to be negotiated.
The standards organizations are in the best position to fill the holes. But they fear participation in standards making will drop if their members lose licensing opportunities with strict FRAND rules. 
On the other hand, if they do nothing, courts will decide these issues under antitrust principles. Their rulings could result in non-participation just as easily.