FRAND, Patents and the Future of Smartphones
Lawsuits are stifling innovation, but FRAND, a collective of industry-standard patents, is trying to save the smartphone market from itself.
You take common features — like 3G connectivity, slide-to-unlock and e-mail notifications — for granted. But these features are at the heart of the squabble over rights and money. Patents have become powerful, and the emerging role of software is a key in competition, leading companies to grow protective of their innovations.
Nearly all major companies are suing — through sales injunctions, product bans or lucrative licensing agreements — to hobble one another before rival products hit the market. But the focus is shifting from allegations of outright infringement, as questions loom over fair use of industry standards — technologies like touch displays, among other core patents.
Enter FRAND, or “fair, reasonable and non-discriminatory” policies. These European rules exist to offer technology without violating patent laws, and they cover common features and help keep competition fair, compensate patent holders and push innovation forward.
Founded in the spirit of cooperation, FRAND lets companies use fundamental technologies to compete. But fair use and compensation complicate a battleground of costly lawsuits, as companies look to profit from claims to these patents, or use them as ammo against rivals.
The problem is the policies are dense, and phone makers are diving into a volatile regulatory landscape that will have major ripples on the future of smartphones.
What Is FRAND?
FRAND is a set of guidelines that cover licensing terms for technologies in a “fair, reasonable and non-discriminatory” way, as determined by the European Telecommunications Standards Institute. It dates back to 1998, well before the era of smartphones.
The rules prevent infringement on fundamental patents to make sure competition is healthy. In theory, Apple or Samsung approaches a patent-owner and reaches settlement to use that innovation in a future device. FRAND, like RAND in the U.S., helps structure and guide these negotiations.
But that was before smartphones, which kicked-off a wildly lucrative and competitive industry. Smartphones compete more on software than hardware, and tint the power to patent owners.
The Purpose of FRAND
The exploding market compounds the problem — there’s no cut-and-dried licensing terms, not when manufacturers race to stay ahead of each other.
In addition, “industry standard,” from an intellectual property view, means it must be used in nearly all devices. And agreeing what’s essential is a problem in, and of, itself. In theory, FRAND fixes that by setting ground rules that move innovation forward. But it’s so convoluted, nobody really knows.
But even if FRAND solves it, companies that use those patents are squabbling over fairness and compensation. A patent holder can ask for a premium on its technology, but it risks antitrust violations if it blocks rivals from using them as well.
How FRAND Is Backfiring
FRAND isn’t specific on terms, so companies are racing to be the first to use them, and then lobby for sales injunctions and force settlements. They try to best one another and take advantage of FRAND — either by demanding terms that are too high, too low or ignore policies altogether.
For example, phone makers, with billions at stake, can claim the patent holder offered unfair terms after they’ve used the technology. Meanwhile, intellectual property owners can counter and allege licensing terms were “fair, reasonable, and non-discriminatory.”
That’s the Apple-Motorola case over 3G patents. After Apple failed to reach terms with Motorola, which owns the patents, Motorola filed an infringement suit, resulting in an online ban of iPhones in Germany — until Apple’s appeal. Apple then revised the terms, staved off the ban and resolved the FRAND cases by using other technologies.
Competition is pushing companies away from FRAND’s intended purpose. Apple even send a letter to regulators asking for set standards on how much patent owners can charge for licensing. European agencies are also investigating manufacturers, including Samsung, for violation of FRAND agreements.
The Future of FRAND and Smartphone Innovation
Right now, European courtrooms are deciding how to dole out billions, escalating the battle between Apple and Android. Companies say licensing practices must change, or they’ll set their own rules. Apple, for example, pushed for fixed FRAND licensing, while Google asked for cuts of iPhones sales beyond a regular license.
Regardless, the stakes are high. In Google’s case, the company said it will take the iPhone maker to court if its 2.25 percent royalty isn’t met — a number that would give it billions beyond what FRAND terms would net.
As companies continue to innovate, infringement claims will continue. Rulings have come down on both sides of the courtroom, making it difficult to figure if FRAND is as sound as intended.
Of course, laws could be revised to better define “fair.” Or fixed percentages could be set for licensing, keeping patent holders from demanding too high a price. Or FRAND could be abolished and rebuilt from the ground up, triggering a patent debate that questions who really owns what.
A revamped fair use policy would drastically alter how manufacturers work with, and against each other, since standards would need to be examined as well.
Either way, patent laws will need some form of update to make sure companies play fair. If the rules remain unclear, unevenly applied or fail to give fair terms for standards, the rules won’t work in an increasingly competitive market.
