What Makes FRAND Fair? The Just Price, Contract Formation, and the Division of Surplus from Voluntary Exchange

I begin, in Part I, by showing that Aquinas’ just price resembles the price emerging from voluntary exchange rather than a regulated price resulting from involuntary exchange, such as compulsory licensing. Furthermore, Aquinas understood the just price to lie along a range of acceptable prices, rather than to occupy a unique point. Put differently, the correct reading of Aquinas is that he identified a just price, not the just price. These two insights correspond to questions of contract law or patent law that currently confront courts in disputes over FRAND royalties.
In Part II, I propose an understanding of the fairness constraint in the FRAND obligation. One can view fairness as being not an end in itself but rather a means to an end—namely, the successful negotiation of a welfare-enhancing voluntary exchange of patented technology that results in contract formation between the SEP holder and the implementer. According to this account, the fairness constraint in the FRAND commitment is a lubricant to achieving the economic efficiency inherent in a successful bargain. Requiring fairness in the pricing of SEPs dissuades both the SEP holder and the implementer from (irrationally) walking away from a voluntary, bilateral licensing negotiation that, if successful, would create a positive surplus. In this sense, the fairness constraint in a FRAND contract makes an incremental contribution to constraining the pricing of FRAND-committed SEPs, above and beyond the respective constraints that reasonableness and nondiscrimination impose.
In Part III, I briefly remark on the relationship between fairness and time. I discuss the economic significance of the legal adage, “Time is of the essence,” which I consider relevant to the division of surplus and thus to the expeditious contract formation for the licensing of SEPs. Unfortunately,recognition of that economic relevance has eluded the courts in the reported decisions on FRAND licensing disputes.
In Part IV, I explain that, although any possible division of the surplus created by voluntary exchange is mutually beneficial, that fact does not imply that every price along the bargaining range (which defines the locus of “reasonable” royalties) is equally likely to yield an agreement. How does a given split of the surplus between the SEP holder and the implementer influence the probability of their successful contract formation within a specified period of time? One interpretation of a fair royalty is that it leads more expeditiously to contract formation than some other division of the gains from trade. That is, the fairness component of the FRAND contract between the SEP holder and the SSO takes on independent meaning by giving teeth to the proposition that time is of the essence in achieving contract formation between the SEP holder and the implementer. Justice (or fairness)—apart from being a virtue in itself—promotes economic efficiency in the sense of hastening voluntary exchange, which is the prerequisite to the expeditious exploitation of the standard.

J. Gregory Sidak

The Criterion Journal on Innovation

2019

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