FRAND Licensing: Ensuring Fairness and Competition in the Use of Standard-Essential Patents

Every time you make a phone call over 4G, connect to Wi-Fi, or stream a video using a standard codec, you are relying on technologies that are protected by patents. These are not ordinary patents – they are Standard-Essential Patents (SEPs): patents that cover inventions without which a technical standard simply cannot be implemented. The catch? A company that holds an SEP sits in an extraordinarily powerful position. It can demand any royalty it wants from every manufacturer who builds a product conforming to that standard. To prevent this power from being abused, the global technology industry developed a contractual safeguard known as FRAND licensing – Fair, Reasonable, and Non-Discriminatory terms. Understanding FRAND is essential not just for technology lawyers, but for anyone navigating the intersection of intellectual property and competition law.

What are standard-essential patents and why do they create market power? 🔗

A standard-essential patent is a patent that protects an invention that is essential to the implementation of a particular technology standard. Standards – such as those for 4G/LTE, 5G, Wi-Fi (IEEE 802.11), Bluetooth, or video codecs like H.264 – are developed by bodies known as Standard-Setting Organisations (SSOs), sometimes also called Standard-Development Organisations (SDOs). Examples include the European Telecommunications Standards Institute (ETSI), the Institute of Electrical and Electronics Engineers (IEEE), and the International Telecommunication Union (ITU).

When an SSO develops a standard, it typically incorporates numerous technical contributions from member companies, many of which are covered by patents. Once the standard is adopted by the industry, there is no alternative route – every manufacturer who wants to build a compliant product must use those patented technologies. This creates a structural lock-in. If a patent owner does not commit to licensing on FRAND terms, they could demand royalties as high as the value of the standard itself – a practice known as patent hold-up. This is precisely the problem that FRAND commitments are designed to prevent.

The FRAND commitment: what it means and where it comes from 🔗

FRAND stands for Fair, Reasonable, and Non-Discriminatory. It is not a statutory requirement under Indian patent law or any single global treaty. Instead, as FRAND obligations typically arise through commitments to SSOs, they are essentially contractual in nature. When a company participates in an SSO and its patented technology is incorporated into a standard, the SSO’s intellectual property policy usually requires that company to commit to licensing its SEPs to all implementers of that standard on FRAND terms.

This commitment serves a dual purpose. It benefits the SEP holder by ensuring that its patented technology is widely adopted – inclusion in a standard virtually guarantees global deployment. Simultaneously, it protects implementers (manufacturers who build standards-compliant products) from exploitation, ensuring they can access the technology at terms that reflect the patent’s actual technical contribution rather than the monopoly leverage created by its inclusion in the standard.

Breaking down each component of FRAND 🔗

Fair means that the royalty must reflect the genuine value of the patented technology, not the inflated market power the SEP holder gains simply because its patent ended up in a widely adopted standard. Reasonable implies that the rate must be commercially proportionate and consistent with what would have been negotiated in an arm’s-length transaction before the standard was adopted – often called a “hypothetical ex-ante negotiation.” Non-Discriminatory means the SEP holder cannot offer significantly different terms to similarly situated licensees. It cannot charge one Indian smartphone manufacturer 5% of the device price and charge a European manufacturer 1% for the same portfolio of SEPs without a justifiable reason.

How royalties are calculated under FRAND 🔗

Determining what is actually “fair” or “reasonable” is where most disputes erupt. SSO activities are recognised as potential sources of economic efficiency, but the SSO process also facilitates market power for intellectual property owners, which is why FRAND royalty analysis differs meaningfully from royalty analysis for non-essential patents. Two main methodologies dominate global practice:

Smallest Saleable Patent-Practising Unit (SSPPU): Royalties are calculated based on the smallest component that actually embodies the patented technology – for example, a baseband chip in a smartphone rather than the entire device. This approach is preferred by implementers and generally by Indian domestic manufacturers, as it limits the royalty base to the actual patented component. Entire Market Value Rule (EMVR): The royalty is calculated as a percentage of the final product’s total sale price. SEP holders tend to prefer this because it generates much higher royalty revenues. In India, the Ericsson disputes exposed precisely this tension – Ericsson demanded royalties based on the entire market value of a device rather than just the patented technology, which Indian manufacturers argued violated FRAND principles.

Another related problem is royalty stacking. A single product like a 5G smartphone may implement hundreds of standards, each involving dozens of SEPs held by different companies. If each SEP holder independently demands what it considers a “reasonable” royalty, the cumulative royalties can make the product commercially unviable. This is why FRAND analysis must account for the aggregate licensing burden, not just individual patent claims in isolation.

Patent hold-up and hold-out: two sides of the same problem 🔗

The FRAND framework must balance two opposing risks. Patent hold-up occurs when an SEP holder exploits the lock-in created by the standard adoption to extract royalties far exceeding the patent’s pre-standardisation value. As the U.S. Federal Trade Commission has noted, patent hold-up can overcompensate patentees, raise prices for consumers, and deter downstream innovation by manufacturers who face the constant risk of hold-up.

Patent hold-out (or reverse hold-up) is the mirror problem. An implementer, knowing that the SEP holder needs to license broadly to enforce its FRAND commitment, deliberately delays or refuses good-faith negotiations – exploiting the fact that the SEP holder’s ability to seek injunctive relief is curtailed by its FRAND obligations. A willing licensee is the precondition for FRAND to function – if an implementer refuses meaningful engagement, courts in several jurisdictions have allowed SEP holders to seek injunctions even in a FRAND context.

FRAND licensing and competition law 🔗

At the heart of FRAND jurisprudence is its intersection with competition law. An SEP holder, by definition, holds a monopoly over a technology that the entire industry must use. This dominant position, if abused – through excessive royalties, discriminatory terms, or unjustified refusal to license – can attract antitrust liability.

The EU’s approach: Huawei v. ZTE 🔗

The landmark European Court of Justice ruling in Huawei Technologies v. ZTE Corp. (2015) is the defining global precedent on this question. The court laid down a structured negotiation protocol: an SEP holder must notify the alleged infringer of the infringement and identify the patents before seeking an injunction. The implementer must then respond diligently and in good faith. Under this EU framework, SEP holders cannot misuse their dominant position through extreme royalties or by seeking injunctions without following FRAND obligations. This decision gave implementers meaningful procedural protection without stripping SEP holders of all enforcement rights.

India’s developing framework: the Ericsson disputes 🔗

India has the world’s second-largest telecommunications network, making it a significant theatre for SEP disputes. The most consequential litigation involved Ericsson, holder of SEPs for 2G, 3G, and 4G technologies, and Indian mobile manufacturers including Micromax, Intex, and Lava. The Competition Commission of India (CCI) intervened, investigating whether Ericsson’s licensing terms were anti-competitive. The CCI found that Ericsson’s royalties had no rational connection to the patented technology, amounted to discriminatory pricing, and that practices like patent hold-up and royalty stacking can lead to an anti-competitive market.

However, the jurisdictional question – whether the Patents Act, 1970 or the Competition Act, 2002 governs SEP disputes – remained unresolved for years. The Delhi High Court eventually held that patents qualify as “goods” under the Competition Act, making SEP holders subject to scrutiny under Section 4 of that Act (abuse of dominant position). The matter reached the Supreme Court in 2024, which issued notices to Ericsson in the CCI’s appeal, making Telefonaktiebolaget LM Ericsson v. Competition Commission of India one of the most watched cases at the interface of IP and competition law in India.

India currently lacks a specific statute governing SEPs. SEPs in India are regulated under the general framework of the Patents Act, supplemented by competition law principles applied on a case-by-case basis. Crucially, there are no explicit thresholds defining what constitutes “fair” or “reasonable” under Indian law, and international FRAND standards are not legally binding within the country’s jurisdiction. This creates significant uncertainty for both SEP holders and Indian manufacturers.

Global divergence in FRAND enforcement 🔗

One of the most practically significant features of FRAND law is that it is interpreted differently across jurisdictions, which creates strategic complexity for multinational companies. Despite SSOs demanding FRAND commitments, they have largely refrained from specifying methodologies for determining FRAND royalty rates, leaving it to national courts and regulatory bodies. In the United States, FRAND is treated primarily as a contractual obligation, with courts applying common law principles and comparable licence agreements. In the European Union, it is closely tied to competition law. Chinese courts have gone further and set global FRAND royalty rates, asserting jurisdiction over worldwide portfolios. Each jurisdiction’s ruling on what is “fair” can conflict with another’s, complicating negotiations for companies operating across these markets simultaneously.

Why FRAND matters for India’s future in 5G and IoT 🔗

As India deploys 5G infrastructure and expands into the Internet of Things (IoT), connected vehicles, and smart manufacturing, the volume and complexity of SEP licensing will only grow. These emerging technologies are heavily dependent on standards – and therefore on SEPs. Without enforceable FRAND guidelines, Indian companies face unfair licensing practices that stifle both competition and innovation, while potentially raising the cost of technology adoption for consumers and businesses alike.

Policy recommendations increasingly advanced by scholars and regulators include: establishing a dedicated tribunal or panel for SEP disputes in India; creating a national SEP registry requiring real-time disclosure of royalty rates and licensing agreements; adopting a clear pre-litigation essentiality assessment mechanism; and developing explicit legislative guidance on FRAND royalty methodologies – bringing India closer to the transparency standards that Japan’s JPO or the EU’s regulatory framework already provide. Without these structural reforms, India risks being perpetually reactive in a domain where proactive governance is essential to protecting both innovation incentives and competitive market access.

What do you think? Given that India has no explicit statutory definition of “fair” or “reasonable” royalty rates under FRAND, should Parliament enact a dedicated SEP legislation, or is judicial development of these norms through competition law sufficient? And with 5G and IoT making SEP licensing increasingly complex, how should Indian manufacturers – many of whom are implementers rather than SEP holders – strategically position themselves in licensing negotiations to avoid both hold-up and costly litigation?

References

1. https://www.wipo.int/en/web/patents/topics/sep
2. https://globalcompetitionreview.com/hub/sepfrand-hub/2023/article/india-seps-and-frand-litigation-policy-and-latest-developments
3. https://www.upcounsel.com/frand-licensing
4. https://link.springer.com/chapter/10.1007/978-981-10-6011-3_2
5. https://nliulawreview.nliu.ac.in/blog/frand-theft-auto-navigating-standard-essential-patents-in-india/
6. https://www.americanbar.org/groups/antitrust_law/resources/source/2024-oct/inherent-hold-up-value/
7. https://or.niscpr.res.in/index.php/JIPR/article/view/17769
8. https://www.globalpatentfiling.com/blog/Standard-Essential-Patenting-and-Frand-Terms
9. https://www.lexology.com/library/detail.aspx?g=86807f19-3e48-4c27-872f-52008ebeefbb
10. https://jipel.law.nyu.edu/jurisdictional-competition-on-standard-essential-patents/
11. https://link.springer.com/chapter/10.1007/978-981-13-1232-8_12