Why FRAND Commitments are Not (usually) Contracts

Guest Post by Professor Jorge L. Contreras

There has been a fair amount of controversy recently over commitments that patent holders make to license patents on terms that are “fair, reasonable and non-discriminatory” (FRAND).  As I have previously written here and here, FRAND commitments generally arise when a patent holder wishes to assure the marketplace that it will not seek to block implementation of a common technology platform or product interoperability standard.  Making such a public commitment encourages widespread adoption of these technologies, which is often beneficial for both the patent holder and the market.  As such, it is important that these commitments be enforced.

The dominant theory that several U.S. courts and commentators have adopted to justify the enforcement of FRAND commitments is common law contract.  The argument goes like this:  the patent holder makes a promise to a standards-development organization (SDO) that it will license its essential patents to others on FRAND terms.  The SDO accepts this promise as consideration for permitting the patent holder to participate in the relevant standardization effort.  Hence, the common law elements of offer, acceptance and consideration are all present.  Then, after the relevant standard is adopted and a vendor incorporates it into a product, the vendor can insist that the patent holder grant it a patent license on FRAND terms.  Even if the vendor was not a member of the SDO, it can seek to enforce the patent holder’s promise as a third party beneficiary.  This line of reasoning was accepted by the federal district courts in Microsoft v. Motorola (W.D. Wash. 2012) and Apple v. Motorola (D. Wis. 2012), by the Federal Trade Commission in its settlement with Google/Motorola, and by several commentators.

Nevertheless, as I discuss in a forthcoming article, common law contract is a poor fit for the enforcement of most FRAND commitments, and relying too heavily on it is likely to have unwelcome results.  Contract law fails as a general-purpose FRAND enforcement theory on several grounds.  First, the simplified offer-acceptance-consideration model laid out above does not reflect the actual manner in which most FRAND commitments are made.  Most of these commitments are not set forth in an agreement between the patent holder and the SDO.  Rather, they are contained in SDO policies, bylaws and other types of statements.  In addition, many of these policies (including those adopted by leading SDOs such as IEEE) do not actually require the patent holder to commit to license its patents on FRAND terms, but only to disclose to the SDO the terms on which it will, or on which it intends to, license its essential patents.  Moreover, FRAND commitments are typically a sentence or two in length, and fail to set forth any of the relevant details of the promised license agreement, whether they be royalty rates, grant-back requirements, terms on which the license may be suspended or terminated, and the like.  As such, whatever “contract” is formed is likely void for want of detail, a mere “agreement to agree”.  Finally, the attempt to extend third party beneficiary rights to every product vendor in the world, whether or not it competed in the relevant business, or even existed, when the promise was made, stretches this venerable doctrine beyond any sensible boundaries.  As a result, except perhaps in a few cases in which standards are developed by small groups of firms that have actual contractual arrangements amongst themselves, common law contract is a poor choice as a general enforcement mechanism for FRAND commitments.

At least one Administrative Law Judge at the International Trade Commission has recently come to the same conclusion in the ITC’s case against Interdigital (337-TA-868, June 18, 2014), expressly ruling that the FRAND policy adopted by the European telecom SDO ETSI “is not a contract”, and merely “contains rules to guide the parties in their interactions with the organization, other members and third parties.”  I couldn’t agree more.

I am not arguing, of course, that FRAND commitments should not be enforced.  I feel quite the opposite, and have argued that these promises form an important subset of a larger category of “patent pledges” that ought to be enforced for the benefit of the market.  However, there are many more sound and coherent theories for enforcing patent pledges, and FRAND commitments in particular, than common law contract.  These include various antitrust and competition law approaches, which have been advanced by the FTC and others, as well as my personal favorite, a modified variant of promissory estoppel that I call “market reliance”.  The market reliance theory is grounded in the fact that patent pledges are promises, whether or not they fulfill the requirements of common law contract, and promises ought to be enforced.  The theory overcomes the requirement that specific and actual reliance be proved in promissory estoppel cases by introducing a presumption of reliance based on the “fraud on the market” theory used in Federal securities law.

But whichever theory eventually prevails for the enforcement of FRAND commitments and other patent pledges, it seems fairly clear that common law contract is useful, at most, in a small subset of these cases.

About Dennis Crouch

Law Professor at the University of Missouri School of Law. Co-director of the Center for Intellectual Property and Entrepreneurship.

21 thoughts on “Why FRAND Commitments are Not (usually) Contracts

  1. Professor Contreras makes some statements that differ from my experience in standards policy work. “Most of these commitments are not set forth in an agreement between the patent holder and the SDO. Rather, they are contained in SDO policies, bylaws and other types of statements. In addition, many of these policies (including those adopted by leading SDOs such as IEEE) do not actually require the patent holder to commit to license its patents on FRAND terms, but only to disclose to the SDO the terms on which it will, or on which it intends to, license its essential patents” It is true that some consortia include membership rules including patent practices to which prospective members must agree, but the vast majority of voluntary consensus standards bodies seek a written assurance that the holder of a patent claim believed to be essential will license that patent claim on reasonable and non discriminatory terms. This written assurance is the “contract” that may arise in a dispute whether a particular license offer is consistent or not with the assurance. Also most SDOs want only a RAND assurance from the owner of a patent claim, the majority do not seek details of proposed license terms and conditions. ANSI for example used to require specific terms and conditions to be submitted but abandoned that in 1997 See History of the Patent Policy of the American National Standards Institute link to papers.ssrn.com and for example Patent Policies and Standards Setting: The Issues – What Is Going On? Why Should I Care? link to papers.ssrn.com

  2. Prof Contreras’ view that “antitrust and competition law” can provide the full framework is flawed. Antitrust law is just a fence confining the outer limits of contract, it is not a replacement for contract. The commitments that Prof. Contreras wants must arise under contract (or promissory estoppel or some other similar body of law) that provides for enforcement of promises. Antitrust only limits the kinds of promises that can be enforced — a misfit.

    The standard-setting process has to be fair — bilaterally between technology contributors and technology users. It’s been a learning process for the SSO’s, and we’re getting better at it. Third-party beneficiary, and principal-and-agent branches of contract provide the necessary legal machinery, with antitrust (and similar bodies of law) as a boundary fence. Advocating creation of a totally new line of law is not a good approach.

  3. Suppose the issue arises in the context of a dispute between the patentee and a manufacturer over how much of a royalty is fair and reasonable. They reach deadlock and the patentee sues the manufacturer for infringement. How practical is it for a court to undertake an antitrust suit or the like (particularly any new and untried legal theory), in comparison to a contract or promissory estoppel (per section 90 of the Restatement of Contracts) defense or counterclaim? Isn’t ease of administration one of the great advantages of the contract/sec. 90 approach–for the parties and the court?

    1. Richard, as you interpret the promise, it is to bargain in good faith for a reasonable royalty.

      I think this is right.

      So there would be breach if the patentee demanded something unreasonable.

      There would likewise be a breach if the manufacturer also demanded something unreasonable.

      But the statute also says “reasonable royalty” and the standards for that are well established, right. So the courts could easily determine who was being unreasonable.

      Now if the manufacturer was being unreasonable, then it should be declared a willful infringer if they infringed without a license and refused to bargain in good faith. Likewise, the ITC might enter an exclusion order for the same reason.

    2. From what I’ve seen the only solution that is practical is contractual. My guess is that a large part of the problems that have prompted all this “reform” could have been avoided by the standards committees requiring these contracts to participate in the standards committees.

  4. It has been argued that patent licenses could be oral contracts, citing De Forest Radio Tel. Co. v. United States, 273 U.S. 236, 241 (1927). 35 USC 261 requires assignments to be in writing for patent applications, patents “or any interest therein” but has no express requirement for a “license” to be in writing. [Or more accurately in the case of a FRAND merely an irrevocable option to obtain a reasonable license.] Not to get into that debate, but could it be relevant to this criticism of FRAND licenses for standards setting participants as to the contractual effect of mere policy statements of the standard setting organization? The argument is that such FRAND licenses are not definite enough to be real contracts. That is an appealing argument, because usually defining the amount of money to be paid is a vital term of a contract, and a “fair and reasonable” payment is quite ambiguous. Yet two D.C.’s have already worked FRAND payments amounts out when they felt they had to. But many oral contracts having debatable terms are enforced, especially where consideration has been received, as for a FRAND license option. There is the consideration of a promised fair and reasonable patent license from the other participants, plus the very important freedom from a product injunction from them, for using the standard. Also, the increased market potential for all of them for a product that has been standardized.

    1. Paul, they are not contracts for a reasonable royalty, but a commitment to license on on a reasonable royalty basis. This seems like a agreement only to negotiate in good faith with an objective standard, the same standard one has for establishing a RR in the damages phase of a patent case.

  5. FRAND commitments are voluntary arrangements between the patentee and the standard body. Those commitments should be enforced to protect the rights of both parties to the voluntary arrangement from the harm of breaching that voluntary arrangement.

    What, other than contract law, is better to uphold the rights of the patentee and the standard body as regards their behaviour inconsistent with their arrangement?

    1. The author provided one answer to your question in the final paragraph:

      there are many more sound and coherent theories for enforcing patent pledges, and FRAND commitments in particular, than common law contract. These include various antitrust and competition law approaches, which have been advanced by the FTC and others, as well as my personal favorite, a modified variant of promissory estoppel that I call “market reliance”. The market reliance theory is grounded in the fact that patent pledges are promises, whether or not they fulfill the requirements of common law contract, and promises ought to be enforced. The theory overcomes the requirement that specific and actual reliance be proved in promissory estoppel cases by introducing a presumption of reliance based on the “fraud on the market” theory used in Federal securities law.

      1. I do not know enough about the proposed answer to know how they would act as a remedy, either to the benefit of the standard body in the case of a breach or foul by the patentee or a remedy to the benefit of the patentee in the case of a breach or foul by the standard body.

        How would action under any of those theories in the final paragraph be better than contract law to restore the balance between the two parties and basically ensure each party is responsible to the other in living up to the voluntary arrangement between the two?

        1. Professor Contreras presented a decent summary, I think, of some of flaws with the contract-based theory for enforcing many FRAND agreements (many of the agreements are arguably void as enforceable contracts).

          The “modified promissory estoppel theory” seems like an interesting practical alternative for enforcing FRAND agreements that are more like reasonably-relied-upon promises than contracts. I’m sure there’s more detail in the full-length paper: link to papers.ssrn.com

  6. No doubt that straightening this out would solve a lot of the problems caused by NPEs taking part in these committees.

      1. Not at all. It seems strange to me as well but NPEs take part in the committees. And from what we just read aren’t locked down by contracts. Maybe this would be an area to focus on to solve some of the problems.

        1. I would not have thought the NPEs to be a problem.

          Licensing is NPE’s only source of revenue, so I would have expected these entities to be generally more open to licensing. Also, because NPEs are not in direct competition with any of the participants in the market, I would have thought they had no incentive to be unfair against one of the participants.

          I would definitely be interested in a study of the behavior of NPEs in standard committees and/or in relation with FRAND commitments.

        2. it’s somewhat strange to me that NWPA would overlook all the great inventions that invent-to-license companies have contributed to various standards.

          Rambus came up with an idea for organizing computer memories that was so good that its near universal. Why would you want to force a second-best?

          Our modern digital wireless communications wouldn’t be possible without ideas in signal coding from several invent-to-license companies, including Qualcomm and Interdigital. Why exclude those ideas because of where they came from?

          Abuses of the standards process — and sanctions — are not confined to NPE’s. Ask Dell Computer and Wang Labs, two PRACTICING entities.

          1. I am not overlooking those. I am talking about what you should have to sign to get on the standards committees. Are you contending that if the NPEs had to sign contractual agreements for FRAND licensing to sit on the standards committees then that would hurt innovation?

          2. One other note is that it is true that other companies have been sanctioned, but it is always important to remember that two operating companies have other ways of hurting each other.

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