A FRAND Contract’s Intended Third-Party Beneficiary

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The FRAND contract gives an implementer the right to obtain an offer to license a portfolio of standard-essential patents (SEPs) on fair, reasonable, and nondiscriminatory (FRAND) terms. By making a FRAND offer, the SEP holder gives the implementer the power to accept and execute that offer in a binding license agreement on FRAND terms. If the implementer rejects the SEP holder’s FRAND offer, either explicitly or by operation of law, the implementer extinguishes its rights as an intended third-party beneficiary of the FRAND contract and thereafter has no rights under the FRAND contract. After the unlicensed implementer has extinguished its rights as a third-party beneficiary, the SEP holder may request and obtain an injunction against the implementer, charge the implementer more than a FRAND royalty, or refuse to license its SEPs to the implementer.

The implementer also may not invoke the FRAND contract to demand extraneous license terms. The FRAND contract gives the implementer no more rights to SEPs than what the SEP holder intends to convey to a third-party beneficiary. In particular, there is no evidence that the SEP holder intended to give the implementer the right to demand à la carte licensing of individual SEPs. For a court to construe the FRAND contract otherwise—so as to compel the SEP holder to license its SEPs individually on demand—is to assume that the SEP holder and the SSO would not have cared about the absurdly high transactions costs of licensing that such a contractual provision would cause. The SEP holder, of course, never would have found it commercially reasonable to agree to make that duty part of its FRAND commitment to the SSO. For the same economic reason, the observed norm within a standardized industry such as mobile telecommunications—the usage of trade, in the parlance of contract interpretation—is that SEP holders license their SEPs in portfolios.

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Cite as

J. Gregory Sidak, A FRAND Contract’s Intended Third-Party Beneficiary, 1 Criterion J. on Innovation 1001 (2016).