LESI: 100 years of FRAND

Broadly adopted standards such as Wi-Fi, 4G LTE, MPEG and Bluetooth enable products made by different vendors to communicate and interact with each other in a manner that is largely invisible to the consumer. Many of these standards have been developed collaboratively by manufacturers, technology providers and others within voluntary trade associations, referred to as standard-setting organisations (SSOs).

One of the risks associated with developing collaborative standards is that one or more competitors will obtain patents covering a standardised technology and use those patents either to prevent others manufacturing and selling standards-compliant products or to extract excessive patent royalties from those wishing to do so.

In order to prevent these types of abuses, most SSOs have adopted policies that require their participants: 1) to disclose patents they own that are essential to the implementation of a standard, and/or (2) to license these essential patents to others on fair, reasonable, and non-discriminatory (FRAND) terms.

While the precise royalty rates and other terms required by FRAND commitments are seldom specified in SSO policies, the commitment nonetheless offers market actors a general level of comfort that the royalty burden on standardised products will not be prohibitive and, more importantly, that licences will not be withheld altogether. FRAND policies today are common features of the standards-setting landscape and have become the subject of significant litigation around the world.

Early access commitments

While FRAND commitments have gained significant attention in the past few years, commitments like these have a history that extends back to the early 20th century, if not before. In essence, FRAND commitments are access requirements. They require a party owning a property right (eg, a patent essential to the production of a standardised product) to grant access to others on terms that meet minimum requirements of reasonableness and non-discrimination.

Such access requirements are sometimes imposed under competition law. One of the earliest examples of a court-imposed access commitment occurred in the 1912 United States v Terminal Railroad case. In that case, it was alleged that a group of railroads and other firms formed a pact to block competitors from using every feasible means of rail and ferry access to the city of St. Louis. The arrangement was challenged under the Sherman Act and the US Supreme Court struck the arrangement down as a conspiracy to restrict trade.

The defendants were ordered to open their association membership to “any existing or future railroad” on “such just and reasonable terms as shall place such applying company upon a plane of equality in respect of benefits and burdens with the present proprietary companies”.

Moreover, if a competitor did not wish to become a member of the association, the conspirators were required to permit it to use their terminal facilities “upon such just and reasonable terms and regulations as will, in respect of use, character and cost of service, place every such company upon as nearly an equal plane as may be with respect to expenses and charges as that occupied by the proprietary companies”. So, although it did not involve patents, the court’s decree in Terminal Railroad was one of the earliest forerunners of today’s FRAND commitments.

1940s: a big decade for FRAND

By the beginning of the 20th century, large industrial concerns in sectors such as railroads, metals, petroleum, glass, and electric lighting had implemented increasingly complex patent licensing and pooling agreements. Many of these arrangements were challenged as anti-competitive by the US Department of Justice (DOJ) as well as competitors in private litigation.

In a number of these cases, injunctive orders were entered prohibiting patent owners from continuing restrictive patent licensing practices, dissolving patent-owning companies, or requiring the divestiture of patents. By 1945, the DOJ had brought 56 suits challenging patent licensing arrangements on competition grounds.

A key development in the DOJ’s enforcement of competition law occurred in the early 1940s. Until that point, remedial orders tended to do no more than prohibit the challenged licensing practices. However, beginning with a series of consent decrees in 1942, the DOJ sought, and courts entered, orders requiring that patent owners grant licences to third parties on “reasonable” terms.

In 1942 cases such as United States v Standard Oil (New Jersey), United States v Aluminum Co of America and United States v American Bosch Corp the DOJ settled actions with defendants under consent decrees making the relevant patents available to all applicants at “reasonable” royalty rates.

The Supreme Court reviewed a patent decree of this kind for the first time in United States v Hartford-Empire in 1945. Hartford-Empire involved an alleged conspiracy to exclude competitors in the glass container industry through the cross-licensing and pooling of patents. Unlike earlier cases involving consent decrees between the DOJ and defendants, the defendants in Hartford-Empire did not settle with the DOJ.

After a 112-day bench trial, the district court found the defendants liable for multiple violations of the Sherman Act. It then entered a remedial decree that required the defendants “to license anyone, royalty free, on all present patents and pending applications for patents for the life of the patents”.

"beginning with a series of consent decrees in 1942, the DOJ sought, and courts entered, orders requiring that patent owners grant licences to third parties on “reasonable” terms."

The Hartford-Empire defendants challenged this decree at the Supreme Court. Though the court affirmed the district court’s ruling on liability, it overturned the remedial decree, finding that forcing Hartford-Empire to grant royalty-free licences would constitute an unjustified “confiscation” of its property. Instead, the Supreme Court instructed the district court to modify the decree to allow the defendants to charge “standard royalties … without discrimination or restriction” on licences of their patents.

Hartford-Empire was the first in a long line of Supreme Court decisions that affirmed contested competition remedial orders requiring the licensing of patents on FRAND terms. From the 1940s to the 1970s, more than 100 such orders were issued by US courts.

AT&T litigation

Throughout its long history, the Bell telephone system operated by AT&T was the target of numerous competition investigations and suits. The AT&T litigation became emblematic of the US government’s post-war impatience with large industrial monopolies and their use of patents. One of the first such suits to be litigated was brought by the DOJ in 1949 and alleged that AT&T and its affiliate, Western Electric, monopolised the telephone equipment market in violation of the Sherman Act. The suit was settled by consent decree in 1956.

While the 1956 AT&T decree is best known for restricting AT&T’s business to common carrier telephone services, thereby excluding it from emerging markets for computers and data processing equipment, the decree also contained patent licensing requirements. Specifically, AT&T and Western Electric were ordered to grant licences to the patents covering the Bell telephone equipment to all applicants.

These licences were required to bear reasonable royalties to General Electric, RCA, and Westinghouse (collaborators that had all entered into prior licensing agreements with the Bell companies), and royalty-free to all others. If the parties were unable to agree on a royalty rate, they could apply to the court for a rate determination.

The 1956 AT&T decree is of interest primarily because of its, and AT&T’s, historical role in the evolution of telecommunications standardisation in the US. During the first half of the 20th century, AT&T operated the national Bell telephone network as a state-sanctioned ‘end-to-end’ monopoly. It controlled both the telephone service and the equipment necessary to use that service, including everything from central switching apparatus to household telephone devices.

Despite this level of control, AT&T could not manufacture every component in the Bell system and was required to purchase many peripheral components from third parties. In order to ensure that these components worked throughout the extensive network, AT&T became an early advocate of standardisation. The company was instrumental in the formation and early work of the American Standards Engineering Committee in the 1920s, and later assumed a leadership role in its successor organisation, the American Standards Association (ASA).

Potential impact of patents

Given the prominent competition enforcement of the early 20th century, members of the ASA were keenly aware of the potential impact of patents on markets for standardised technologies. Beginning in 1932, the ASA permitted SSOs to include patented technologies in standards as long as “monopolistic tendencies” were avoided.

However, it was not until 1956, around the time of the first consent decree in the AT&T suit, that the ASA board of directors began to consider a formal policy requiring the licensing of patents covering standardised technologies. This policy was formally adopted in 1959. It permitted the approval of national standards covered by patents, as long as the patent owner offered to license the relevant patents to others on “reasonable terms”.

Though it has been amended and expanded multiple times, the 1959 ASA policy still forms the basis for the American National Standards Institute’s current patent policy that is applicable to all developers of national standards.

Today’s FRAND policies have a lineage of more than a century, extending back to early competition cases involving access to essential facilities and the remediation of anti-competitive patent licensing and pooling practices. While FRAND commitments imposed by SSOs on their participants seek to prevent, rather than remedy, potentially abusive practices, today’s SSOs, litigants and policymakers would be well advised to remember these historical precedents when crafting and analysing FRAND commitments.

This article is based on Jorge Contreras, A Brief History of FRAND: Analyzing Current Debates in Standard-Setting and Antitrust through a Historical Lens, 80(1) Antitrust L.J. 39-120 (2015)

Jorge Contreras is an associate professor of law at the University of Utah S.J. Quinney College of Law, and a senior policy fellow in the Program on Information Justice and Intellectual Property at the American University Washington College of Law. He can be contacted at: jorge.contreras@law.utah.edu