Fair, Reasonable and Non Discriminatory terms

Standard setting organizations commonly have rules that govern the ownership of patent rights that cover the standards the adopt. One of the most common rules is that a patent covering the standard must be adopted on "reasonable and nondiscriminatory terms" (RAND) or "fair, reasonable and nondiscriminatory terms" (FRAND). The two terms are generally interchangeable; FRAND seems to be preferred in Europe and RAND in the U.S.Fact|date=October 2008

In licensing, Fair, Reasonable and Non Discriminatory terms (FRAND) refers to the obligation that is often required by Standards Setting Organizations (SSOs) for members which participate in the standard setting process. Standards Setting Organizations are the industry groups which set common standards for particular industry in order to ensure compatibility and interoperability of devices manufactured by different entities. The standards set by these organizations are the reason why telephones can connect with each other, why the Internet works and coffee machines are able to plug into local sockets.

Standards Setting Organizations include this obligation in their bylaws as a means of enhancing the pro-competitive character of their industry. They are intended to prevent members from engaging in licensing abuse based on the monopolistic advantage generated as a result of having their intellectual property rights (IPR) included in the industry standards. Without such commitment, members could use monopoly power inherent in a standard to impose unfair, unreasonable and discriminatory licensing terms that would damage competition and inflate their own relative position. While there are no legal precedents to spell out specifically what the actual terms mean, it can be interpreted from the testimony of people like Professor Mark Lemley from Stanford University, in front of the United States Senate Committee on the Judiciary that the individual terms are defined as follows:

Fair relates mainly to the underlying licensing terms. Drawing from anti-trust/competition law; fair terms means terms which are not anticompetitive and that would not be considered unlawful if imposed by a dominate firm in their relative market. Examples of terms that would breach this commitment are; requiring licensees to buy licenses for products that they do not want in order to get a license for the products they do want (bundling), requiring licensees to license their own IP to the licensor for free (free grant backs) and including restrictive conditions on licensees’ dealings with competitors (mandatory exclusivity).

Reasonable refers mainly to the licensing rates. A reasonable licensing rate is a rate charged on licenses which would not be result in an unreasonable aggregate rate if all licensees charged a similar rate. Clearly aggregate rates that would significantly increase the cost to the industry and make the industry uncompetitive are unreasonable. It is worth noting that a licensor which has several different licensing packages might be tempted to have both reasonable and unreasonable packages. However having a reasonable “bundled” rate does not excuse having unreasonable licensing rates for smaller unbundled packages. All licensing rates must be reasonable.

Non-Discriminatory relates to both the terms and the rates included in licensing agreements. As the name suggests this commitment requires that licensors treat each individual licensee in a similar manner. This does not mean that the rates and payment terms can’t change dependent on the volume and creditworthiness of the licensee. However it does mean that the underlying licensing condition included in a licensing agreement must be the same regardless of the licensee. This obligation is included in order to maintain a level playing field with respect to existing competitors, and to ensure the potential new entrants are free to enter the market on the same basis.

The most controversial issue in FRAND licensing is whether the "reasonable" license price should include the value contributed by the standard-setting organization's decision to adopt the standard. A technology is often more valuable after it has been widely adopted than when it is one alternative among many; there is a good argument that a license price that captures that additional value is not "reasonable" because it does not reflect the intrinsic value of the technology being licensed.

Further reading

* Pat Treacy and Sophie Lawrance, " [http://jiplp.oxfordjournals.org/cgi/content/abstract/jpm212v1?papetoc FRANDly fire: are industry standards doing more harm than good?] ", Journal of Intellectual Property Law & Practice, 2007, doi:10.1093/jiplp/jpm212

ee also

* Reasonable and Non Discriminatory Licensing (RAND)