Tuesday 21 December 2010

EU Commission on FRAND

Connoisseurs of European Union legislation will be delighted with the latest Commission tome which is imaginatively entitled "Guidelines on the Applicability of Art 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements". This magnificent 94-page opus replaces the 2001 version of the guidelines and will no doubt be welcome Christmas reading to aficionados of EU competition law. The work is dedicated to providing guidelines on "horizontal cooperation agreements", which are defined as being those between agreements entered between actual and potential competitors. The EU appreciates that such horizontal agreements can lead to substantial economic benefits, in particular if the participants in the agreements combine complementary activities, skills or assets. The guidelines are intended to provide indications of safe harbors in which such agreements are or would be valid and would not lead to problems in competition law.#alttext#

Readers of the IP Finance blog may well find the discussion on FRAND commitments in standardization agreements to be highly relevant, since the EU has given some insights into its thinking on how a FRAND definition might operate. The guidelines note that FRAND commitments are designed to ensure that technology protected by intellectual property rights (IPR) are accessible to users on Fair, Reasonable And Non-Discriminatory terms (hence the FRAND acronym). FRAND commitments can prevent IPR holders from making implementation of a standard difficult by refusing to license or requesting unfair or unreasonable fees.

The Guidelines notes that the assessment of fees should be based on the economic value of the IPR - which seems highly reasonable and certainly not revolutionary - and several methods are available to make this assessment. The cost-based methods are not well-adapted. The Guidelines states that this is because of the difficulty in assessing costs attributable to the development of the patents or group of patents. In this author's view, the major downside with the cost-based method is the fact that any figures about historic costs obtained bear little or no relevance to the commercial implementation of the IPR.

The Guidelines suggest that one way of assessing FRAND terms would be to compare the licensing fees charged by the IPR holder for the relevant patents in a competitive environment before the industry has been locked into the standard with those charged after the industry has been locked in. This, of course, makes the assumption that the relevant data is available. It's also possible that the relevant patents have, prior to the adoption of the standard, not been licensed. Indeed in some sectors, many IPRs have been developed and filed with the aim of being incorporated into the standard - and those rights may well be dropped if they are not incorporated.

#alttext#Finally the Guidelines suggest that an independent expert assessment be obtained about the centrality and essentiality to the standard of the relevant IPR portfolio. This is the author's knowledge, the most common way of assessing FRAND terms at present. An examination is made about the portfolio in question and its relation to other relevant IPR portfolios. It still fails to address the question of the level of fees. And for this the Guidelines suggest two alternatives: public disclosures made by IPR holders in the context of the standard setting process and/or comparison with the rates levied in other comparable standards. Both methods are currently used in practice and it is good to see the EU Commission giving its "badge of approval" even if it does wand that "nothing in these Guidelines prejudices the possibility for parties to resolve their disputes about the level of FRAND royalty rates by having recourse to the ... courts".

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