The Economics of FRAND.

The economic valuation of intellectual property is an area with which IP professionals still need to fully come to grips with. In the context of Standard Essential Patents (SEPs), the valuation of fair, reasonable and non-discriminatory (FRAND) royalty rates adds an additional level of complexity. Against this background, this paper aims at economically clarifying basic elements of FRAND valuation and royalty rate determination. The concept of FRAND is briefly touched upon, so as to establish the framework for the discussion, but central to the paper is the calculation of a FRAND royalty rate of standard essential patents against a more comprehensive framework on economic valuation in general and the valuation of intellectual property in particular. Specifically, it discusses FRAND royalty calculations in light of the conception of the ‘present value added’. The determination of a FRAND value on the basis of the present value added that the patented feature has to a specific application satisfies a number of key requirements. Like any other rational economic valuation of tangible or intangible assets, it hinges the concept of value on the ability to generate future earnings rather than on past performance or on a static benchmark approach. Such an approach is valuable, because it allows for the application of a generic, theoretically sound and neutral method in the determination of a FRAND rate. The concept can also be used in the absence of comparable licenses and/or newly developing business sectors.