Published: 1/13/15
In this statement, the FTC explained the potential of FRAND abuse to facilitate hold-up of standard implementers. The Commission stated that “incorporating patented technologies into standards also has the potential to distort competition by enabling SEP holders to use the leverage that they may acquire as a result of the standard setting process to negotiate higher royalty rates or other favorable terms after the standard is adopted than they could have credibly demanded beforehand. This is one form of ‘patent hold-up.’” The Commission explained that “[b]efore a standard is adopted, multiple technologies, with similar attributes, may compete for selection into the standard” but that after the adoption of a standard, “an entire industry begins to make investments tied to the standard.” Because of these investments, standard implementers “may face substantial switching costs in abandoning initial designs and substituting a different technology,” and consequently “an entire industry may become locked into practicing a standardized technology.” “In this situation,” the FTC explained, “a firm with a patent essential to the standard has the ability to demand royalty payments, and other favorable licensing terms, based not only on the market value of the patented invention before it was included in the standard, but also on the costs and delays of switching away from the standardized technology.” The Commission explained that FRAND commitments are designed “to mitigate the threat of patent hold-up” but that “the potential for hold-up remains if the RAND commitment is later disregarded, because the royalty rate often is negotiated after the standard is adopted.” The Commission went on to explain that “the threat of an injunction or exclusion order, combined with high switching costs, could allow a patent holder to obtain unreasonable licensing terms that reflect the hold-up value of its patent despite its RAND commitment.” This situation “can raise prices to consumers, distort incentives to innovate, and undermine the standard setting process.”