"What does it mean for a patent holder to commit to a standard-setting organization (SSO) to license its standard-essential patents (SEPs) on fair, reasonable, and nondiscriminatory (FRAND) terms? When is a royalty FRAND? Drawing from both legal theory and economic theory, I propose an interpretation of FRAND that distinguishes and reconciles the conflicting definitions of FRAND and provides courts a practical approach to identifying FRAND royalties. A proper understanding of a FRAND royalty requires recognizing the combinatorial value of standard-essential patents. That recognition reveals the fallacy in attempting to apply the “ex ante incremental value” rule to the determination of a FRAND royalty. FRAND royalties divide the aggregate royalties generated by the standard among the holders of patents essential to the standard. Such a division should maximize the surplus resulting from the standard’s creation. It must also satisfy an individual-rationality constraint for the patent holder and the licensee, thereby encouraging continued participation in the setting and implementation of open standards, as opposed to greater reliance on proprietary standards".Greg has kindly purchased "open access" to the article from Oxford University Press, so anyone may download the published version for free, by clicking here.
This blogger's appreciation of the subject is limited by his relative lack of sophistication in dealing with the economic side of it, but if any reader with the relevant expertise would like to review it, he'd be grateful.