We recently came across a new paper written by noted scholars Mark Lemley and Carl Shapiro that we thought was worth passing along.  Lemley and Shapiro have written extensively about the interplay between patent issues and standard-setting, including the oft-cited article “Patent Holdup and Royalty Stacking.”  In their new paper, titled “A Simple Approach to Setting Reasonable Royalties for Standard-Essential Patents,” Lemley and Shapiro propose a way to tackle the difficult task of determining the appropriate terms for a FRAND-encumbered standard-essential portfolio (if the parties are unable to agree on terms).

Their solution to this common problem?  Requiring the parties to enter into a binding “baseball-style” arbitration – where each party must propose its final offer, and the arbitrator picks which one is the most reasonable (the arbitrator cannot choose a different number).  In their paper, Lemley and Shapiro describe how their proposed system would work in practice, and claim it would moot many of the FRAND-related disputes ongoing today.

Here’s the abstract:

Standard Setting Organizations (SSOs) typically require their members to license any standard-essential patent on Fair, Reasonable, and Non-Discriminatory (FRAND) terms. Unfortunately, numerous high-stakes disputes have recently broken out over just what these “FRAND commitments” mean and how and where to enforce them. We propose a simple, practical set of rules regarding patents that SSOs can adopt to achieve the goals of FRAND commitments far more efficiently with far less litigation. Under our proposed approach, if an standard-essential patent owner and an implementer of the standard cannot agree on licensing terms, the standard-essential patent owner is obligated to enter into binding baseball-style (or “final offer”) arbitration with any willing licensee to determine the royalty rate. This obligation may be conditioned on the implementer making a reciprocal FRAND Commitment for any standard-essential patents it owns that read on the same standard. If the implementer is unwilling to enter into binding arbitration, the standard-essential patent owner’s FRAND commitment not to go to court to enforce its standard-essential patents against that party is discharged. We explain how our proposed FRAND regime would work in practice. Many of the disputes currently arising around FRAND commitments become moot under our approach.

It’s certainly an interesting proposal, and the paper is well worth a read.  Thanks in part to the FTC’s consent decree with Google (which expressly allows licensees the option of arbitration) and statements made by Motorola in its dispute with Apple (where Motorola argued arbitration was the best way to determine FRAND terms), arbitration has been getting more attention from the FRAND community.