Standard-Essential Patents and the Problem of Hold-Up

Commitments to license patents essential to industry standards on fair, reasonable and non-discriminatory (“FRAND”) or on reasonable and nondiscriminatory (“RAND”) terms are ubiquitous in high-tech industries, but the commercial and legal consequences of these promises remain far from resolved. This uncertainty does not reflect a lack of attention or interest in the topic. To the contrary, a substantial body of commentary and a developing body of case law and enforcement agency guidance has addressed the proper interpretation and enforcement of FRAND commitments by owners of standard essential patents (“SEPs”). Despite general recognition that breaches of FRAND commitments by SEP owners carry the potential to hold up implementers of industry standards through post-contractual opportunism, some SEP holders and their advocates have questioned the existence of such a problem and have argued that SEP holders themselves are subject to hold-up by standard implementers that refuse their royalty demands.

Following a brief review of the background and policy considerations underlying FRAND commitments to standard-setting organizations (“SSOs”), this article reviews evidence of efforts by holders of FRAND-encumbered SEPs to evade FRAND commitments. A growing body of case law now adds empirical heft to the viewpoint that the concerns over breaches of FRAND commitments are real, and that patent hold-up poses a substantial risk of subverting the system of cooperative standard-setting and thereby undermining the widespread benefits that it confers on society. After discussing this case law and its implications for the debate regarding the hold-up problem, we consider a number of arguments that have been interposed to suggest that patent hold-up is not a serious concern, and demonstrate that they are flawed.