Presentation delivered during 9th Seminar on Media and the Digital Economy (21-22 March 2019). http://fsr.eui.eu/event/annual-scientific-seminar-on-media-and-the-digital-economy-9th-edition/

1. What is ‘fair’ and ‘reasonable’?
Lessons on the conept of FRAND from EU competition policy
and regulation of electronic communications
9° Scientific Seminar on Media and the Digital Economy
Marco Botta, EUI
Alexandre De Streel, University of Namur
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2. Outline
• Objective: analyse FRAND concept in SEP disputes in the light of EU competition and electronic
communications law.
• Research questions:
1) What is FRAND? Is there a general FRAND principle under EU competition and electronic
communications law?
2) What are the prons. and cons. of the methods used in competition and electronic communications law
to calculate FRAND? Any lesson for SEPs related disputes?
• Legal analysis of CJEU and national case law, as well as relevant EU legislation.
• Concept of ‘non-discrimination’ ➢ outside the scope of the research.
• Word in progress ➢ comments are more than welcome!
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3. FRAND in SEP disputes
• When SSOs define a new standard for the industry, SEP holders have two main obligations:
1) Transparency obligation.
2) License SEP to any potential licensee on Fair, Reasonable and Non Discriminatory (FRAND) terms.
• SSOs do NOT provide guidelines about FRAND ➢ royalty calculation left to bilateral negotiation between
licensor and potential licensee.
• SSOs do NOT verify the ‘essentiality’ of patents for the selected standards.
• Risk of patent hold-up: SEP holder might ask an excessive roaylty rate from the potential licensee due to
its stronger bargaining power ➢ lock-in effect caused by the standard and need to ensure products
interoperability.
• If the licensor and potential licensee do NOT achieve an agreement on license conditions, FRAND is
determined by national courts or via arbitration. 3

4. FRAND in US case law – Georgia Pacific factors
Georgia Pacific factors ( US District Court, Southern NY, 1970) Revised conditions in SEP disputes (Microsoft v. Motorola, US
Court of Appeals, 9th District, 2015)
Royalties patentee receives for licensing the patent in suit Royalties received by the patentee in comparable FRAND circumstances
Rates licensee pays for use of other comparable to the patent in suit NO modification
Nature and scope of license in terms of exclusivity and territory / customer restrictions NO modification
Licensor’s established policy and marketing program to maintain patent monopoly Inapplicable
Commercial relationship between licensor and licensee (e.g. competitors, inventors, promoters) Inapplicable
Value of the patent in promoting sales of other products of the licensee/licensor Applicable, BUT taking into account only the value of the patented technology
Duration of patent and term of license Of little significance, as duration of the patent and license usually coincide
Established profitability of the products made under the patent (e.g. commercial success) Applicable, BUT taking into account only the value of the patented technology
Utility and advantages of patent property over old modes and devices Adavntages of the patent over alternatives that could have been included in the standard
The nature of the patented invention; the character of the commercial embodiment of it as owned
and produced by the licensor; and the benefit of those who have used the invention
Contribution of the patent to the standard
The extent to which the infringer has made use of the invention and the value of such use Contribution of the patent to the standard
The portion of profit or selling price customarily allowed for the use of the invention Customary FRAND commitments should be taken into account
The portion of profits attributable to the invention, distinguished from non- patented elements To be applied carefully
Opinion testimony of qualified experts NO modification
Outcome from hypothetical arm’s length negotiation at the time of infringement began Hold-up; royalty stacking; reasonable compensation to reward SEP holder
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5. FRAND in the EU
• Georgia Pacific explain the criteria that US courts follow to decide if the royalties negotiation between
licensor and potential licensees was ‘fair’ ➢ NO direct definition of FRAND.
• CJEU in Huawei v. ZTE: SEP holder has to offer a license on FRAND terms, BUT NO definition of FRAND.
• EU Commission Communication on SEP (Nov. 2017) ➢ limited guidance on FRAND definition:
1) “There is no one-size-fits-all solution on what a FRAND is: what can be considered fair and reasonable
differs from sector to sector … the Commission encourages stakeholders to pursue sectoral discussions …”
2) “Determining a FRAND value should require taking into account the present value added of the patented
technology. That value should be irrespective of the market success of the product.”
3) “In determining a FRAND value, parties need to take account of a reasonable aggregate rate for the
standard”  to avoid royalties stacking.
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6. Main methods followed by economists to calculate FRAND royalty in SEP disputes
• Incremental value (Microsoft v. Motorola):
i. Contribution of the patented technology to the standard;
ii. Availability of alternative technology to fulfill the standard requirements
Problem: individual SEP does NOT have an ex-ante value ➢ if licensee does NOT conclude license agreements for
other SEPs, it can NOT implement the standard = value of an individual SEP can NOT be estimated a priori.
• Numeric proportionality: royalty paid by the licensee are distributed among different SEP holders, in
proportion of the number of SEPs that each patent holder owns in relation to the standard.
Problem: numeric proportionality does NOT take in consideration the individual contribution of each technology
to the standard.
• Rule of thumb: royalty is calculated on the basis of the average licensees’ historical profits in selling products
embedding the licensed technology.
Problem: access to historical data in relation to the industry.
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7. Main methods followed by economists to calculate FRAND royalty in SEP disputes
• Proportional contribution:
i. Market-determined price of the down-stream product.
ii. Proportional share of the value of the product that derives from the standard.
iii. Proportional share of the value of the standard that derives from the licensed patent.
• Top-down (CISCO v. Innovatio, US District Court for Northern District of Illinois, 2013):
i. Market-determined price of the smallest salable component.
ii. Average profit margin of the component.
iii. Proportional share of the value of the standard that derives from the licensed patent.
• Benchmarching:
i. Comparison royalty rate applied by SEP holder in licensing the same patent to third parties.
ii. Comparison royalty rate applied by other SEP holders in licensing a similar patent, relevant for the same
patent
• Problems: comparability of patents; previous negotiations might also have been affected by hold-up.
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8. FRAND in EU Competition law
• The concept of FRAND is increasingly relied by NCAs/Commission:
1) Abuse of dominant position: Exploitative practices
A dominant undertaking abuses its dominant position by ’directly or indirectly imposing unfair purchase or
selling prices or other unfair trading conditions’ ➢ excessive prices are NOT ‘fair’ and ‘reasonable’.
2) Abuse of dominant position: Exclusionary practices
Huawei v. ZTE: SEP holder breaches Art. 102 TFEU if it asks for a court injunction to stop a patent
infringement, unless it has previously offered to the infringer the opportunity to license the patent on FRAND
basis.
3) Merger control
Behavioural remedies requiring the merging parties to provide access to an important input to a third party on
FRAND terms.
• Concept of FRAND is increasingly relied in EU competition law, BUT only the assessment of excessive prices
under Art. 102(a) provides guidelines on methods to estimate what is a ’fair’ and ‘reasonable’ price.
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9. Unfair prices under Art. 102 (a) TFEU
• United Brands (para. 252): the price charged by the dominant undertaking is ‘excessive’ (i.e. NOT fair and
reasonable), when 2 cumulative conditions are fulfilled:
i. Excessive limb: the difference between price and costs is ‘excessive’.
ii. Unfair limb: the price is ‘unfair in itself’ OR ‘unfair when compared to competing products’.
• ‘Other ways may be devised – and economic theorists have not failed to think up several – of selecting the
rules for determing whether the the price of a product is unfair’ (United Brands, para. 253) ➢ benchmark tests:
1) Comparison between the prices charged by the same dominant firm in different markets.
2) Comparison between the prices charged by the dominant firm and those charged by other firms either ‘in
the same market’ ➢ comparison with other EU MS accepted by CJEU in AKKA-LAA:
i. Member States for comparison selected on the basis of ’objective, appropriate and verifiable criteria’ – e.g.
‘consumption habits and other economic and sociocultural factors, such as gross domestic product per capita and
cultural and historical heritage’.
ii. Comparison with other EU MS made on a ‘consistent basis’.
3) Comparing the profits of the dominant firm either with ‘a normal competitive profits’ OR with ‘the profits of
other firms’.
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10. United Brands – excessiveness limb
• Measuring the relevant ‘costs’:
1) Costs benchmarks (CAT, Albion Water):
i. Average Accounting Cost plus (AAC+)
ii. Local Accounting Costs (LAC)
iii. Long-Run Incremental Cost (LRIC)
2) Capital costs:
i. Sunk costs (EU Commission decision, Scandelines)
ii. Sharing common costs.
iii. Measuring the amount and cost of capital (NOT considered by Italian NCA in Aspen)
iv. Measuring the return on sales.
• The difference between ‘price’ and ‘cost’ has to be ‘appreciable’ (CJEU, AKKA-LAA): NO minimum threshold,
BUT the price/cost difference has to be ‘significant and persistent’.
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11. United Brands – unfairness limb
• In Pfizer-Flynn, CAT annulled the CMA decision because CMA had concluded that the price of drugs charged by
Flynn was ‘unfair in itself’, without assessing if the price was ‘unfair when compared to competing products’ ➢
the 2 options of the unfair limb have BOTH to be assessed by the NCA for cross-examination of the results.
• ‘Unfair in itself’ implies that the price of the product is ‘excessive’ in comparison to its economic value ➢
assessment of the consumers’ willingness to pay for a product???
• ‘Unfair when compared to competing products’: in Pfizer-Flynn, the CMA noted that the price of similar tables
was generally lower in other EU MS than in UK ➢ CAT annulled the CMA decision since it did not try to explain
why the price of competing tables was lower in other EU MS (i.e. presence of price regulation?)
• The unfairness limb represents the main obstacle faced by a NCA in applying United Brands test.
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12. FRAND in EU regulation of electronic communications
• Directive 2002/19 (2002 Access Directive):
1) Art. 5(1b): NRA can impose access to ensure accessibility for end-users to digital radio and TV broadcasting
services on FRAND terms.
2) Art. 12(1): a NRA may impose access obligations on the incumbent’s network when ‘denial of access or
unreasonable terms’ would obstract the emergence of a competitive market.
3) Art. 13 Access Directive deals with price regulation based on the incumbent’s costs.
• 2002 Access Directive will be replaced by Directive 2018/1972 (EU Electronic Communications Code).
• Access obligations on FRAND terms further broadened in the new EU Electronic Communications Code:
1) Art. 57(4): economic operators have the right to access ‘small-area wireless access points’ deployed by public
authorities on the basis of FRAND conditions.
2) Art. 61: NRAs can impose access obligations on FRAND terms to ensure accessibility for end-users to digital
radio and TV broadcasting services on FRAND terms.
3) Art. 76: NRA can impose access obligation on FRAND terms in relation to ‘new very high capacity network
element’ held by the operator holding significant market power.
4) Annex IV: co-investors in an optical fiber network shall grant each other access to the network on ‘fair’ and
‘reasonable’ terms.
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13. Methods relied by NRAs to calculate access price to the incumbent network
• Cost-based: access price based on the incumbent costs ➢ main method used by NRAs in Europe.
Costs methods used
- Pure LRIC
- LRIC +
- Fully Distributed Costs
- Stand Alone Costs
• Benchmarking: access price calculated on the basis of the price applicable in comparable/competitive markets
• Fair and reasonable
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14. Preliminary conclusions
• Under US and EU case law, the SEP holder is subject to a general duty to license its patent on FRAND terms,
BUT NO common definition of the methods to calculate a ‘fair’ and ‘reasonable’ royalty.
• FRAND is an accepted principle in EU competition and electronic communications law ➢ general
principle of EU law:
1) Competition Law: excessive limb (costs) and unfaireness limb (fairness) ➢ benchmark
2) Sector regulation: cost based on fairness based ➢ benchmark
• Complex economic assessement
• Effects of price regulation methods on the incentives
• Dominant and entrants
• Investement and innovation
• On a facility which is ‘essential’ 14

15. Preliminary Bibliography
• Contreras J. (2018), “Much Ado about Hold-up” University of Utah College of Law Research Paper No. 269.
https://dc.law.utah.edu/ulr/ (19.3.2019).
• Desmedt A., De Streel A. (2014), “La Régulation des Prix dans un Secteur des Communications Electroniques Libéralisé”
2 Revue du droit des industries de réseau: 129-143.
• Elhauge E. (2008), “Do Patent Holdup and Royalty Stacking Lead to Systematically Excessive Royalties?” 4(3) Journal of
Competition Law and Economics: 535-570.
• Heim M., Nikolic I. (2019), “A FRAND Regime for Dominant Digital Platforms”. Report of the 4iP Council, January 2019.
https://www.4ipcouncil.com/news/new-report-explores-value-frand-regime-dominant-digital-platforms (19.3.2019).
• Motta M., De Streel A. (2007), “Excessive Pricing in Competition Law: Never Say Never?” In Konkurrensverket (Swedish
Competition Authority, ed.), The Pros and Cons of High Prices (Stockholm, Lenanders Grafika).
• Neven D., Regibeau P. (2017), “Unwired Planet v. Huawei: A Welcome Clarification of the Concept of FRAND and the
Role of Competition Law Towards SEP Licensing”. 8(7) Journal of European Competition Law and Economics: 463-467.
• Petrovcic U. (2013), “Patent Hold-Up and the Limits of Competition Law” 50 Common Market Law Review: 1363-1386.
• Robertson V., Botta M. (2019), “Access to Justice as Abuse of Market Power? Injunctive Relief for Standard Essential
Patents under US Antitrust and EU Competition Law”. In Nihoul P., Van Cleynenbreugel (eds.), The Roles of Innovation
in Competition Law Analysis (2018, Edward Elgar Publishing). Pages 246-273.
• Sidak G. (2013), “The Meaning of FRAND, Part 1: Royalties” 9(4) Journal of Competition Law and Economics: 931-1055.
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