Incremental Value and FRAND
Licensing
ANNE LAYNE-FARRAR
VICE PRESIDENT
COMPASS LEXECON
3 RD C O N F E R E N C E O N R E C E N T D E V E L O P M E N T S I N
COMPETITION ENFORCEMENT, ROME 6 MAY 2011
Defining FRAND Licensing
 What FRAND means for patent licensing in standard
setting still being debated

No consensus yet, aside from minimum requirement of
preventing a refusal to license or exclusive licensing
 A number of cases settled/ended before FRAND
defined or precedent established


Rambus cases – US FTC, EC
Qualcomm cases – EC, US private lawsuits
A Court Precedent May still be set…
 A number of cases involve FRAND
 KFTC on brink of Rambus investigation
 IPCom – HTC, Nokia lawsuits in Germany, US
 Nokia – Apple ITC litigation
Today’s Popular Proposal: Incremental Value
 A number of theories/definitions suggested
 Patent-count “proportionality” approaches broadly rejected
 Ex ante/ex post test: good for ex post analysis, provides
competition safe harbour (See Mariniello, forthcoming)

Only applies when ex ante licenses exist
 The incremental value rule offered to fill the gap
 Suggests that FRAND limits patent holders to charging the
incremental value of their patented technology, over the next
closest alternative
How to Define “Incremental Value”
 One view: Dolmans
 Value of innovation of technology A = price of next best
alternative B + opportunity cost of “not using A”
 Where “next best alternative” is likely priced at zero:

“Indeed, in a competitive and non-collusive environment, royalties
for equivalent and competitive technical solutions would tend
towards marginal costs, which is often close to zero in the case of
IT.” Dolmans et al. (2007)
How to Define “Incremental Value” (2)
 Another view: Lemley & Shapiro (2007):
 Bargaining power × Incremental value of patent × Probability
that patent is valid (B ×V × θ)


B and θ are both fractions, less than or equal to one
V × θ is “is neither feasible nor desirable” when a standard
involves complements because V will include spillovers (sum is
greater than its parts)
Important Assumptions Behind Both Views
 Dolmans approach (V ≈ 0) assumes stiff competition
during standardization


SSOs faced with plethora of existing, viable alternatives, so
none is very valuable until a standard is based upon it
This will apply only to certain circumstances, not clear that it
will be where most disputes arise
 Lemley-Shapiro approach (B × V × θ) assumes
particular definition of “ex ante”


First round, fundamental technology is already discovered,
only complementary innovation remains
Protect licensees and follow-on inventors, but ignore
incentives to invest in pioneering R&D
Balancing Licensors and Licensees
B*V*θ
Appropriation of manufacturer
value by patent holder
v
Appropriation of patent holder value
by manufacturer
 V can be defined as specific to a patent
When “Ex Ante” is Set Matters
 Most often, “ex ante” refers to “before the standard is
voted on, published, or implemented”

Meant to avoid lock in of implementers
 But a more complete view would be “before the
technologies important for a standard have been
developed”


Innovators need incentives to invest in R&D and to contribute
that R&D to a standard
SSO participation is voluntary
A Third View of Incremental Value
 Layne-Farrar, Llobet, and Padilla (2011)
 Fully ex ante view, before either party has made irreversible
investments
 Key question is SSO participation
 Conditional on innovators joining SSO, the incremental value
rule (V weighted by probability of successful standard) creates
incentives for optimal R&D expenditure
 But, when we drop the assumption that all parties will join, we
find that the incremental rule would
lower R&D investments among innovators
 lower SSO participation rates among patent holders
 lower aggregate earnings for SSO members as a whole

How to reconcile the different views?
 The time horizon matters:
 L&S notion of standard value spillovers consistent with our
finding that innovators need something more than V to ensure
participation, when longer time is allowed
Sharing spillover rents between licensors and licensees is both fair
and reasonable
 Allows incentives for both pioneering and complementary/followon R&D investments

 Incremental value is fact-specific
 If Dolman’s notion of value fits the facts, then V would be quite
low

No need restrict it further, but would need evidence first
Concluding Remarks
 Incremental value has promise, but competition
authorities should proceed carefully


Rules depend critically on the assumptions and definitions
Standards typically involve long term efforts, with multiple
iterations


Incentives to join an SSO, to continue investing in R&D, and to
contribute to standard setting efforts are important
There is no universal incremental value “cap”

V will depend on the technologies involved and circumstances at
hand