Formulas for Fair, Reasonable and Non-Discriminatory royalty determination

Abstract

This paper takes an axiomatic approach to determining ldquofair, reasonable, and non-discriminatoryrdquo (ldquoFRANDrdquo) royalties for intellectual property (ldquoIPrdquo) rights. Drawing on the extensive game theory literature on ldquosurplus sharing/cost sharingrdquo problems, the author describes specific formulas for determining license fees that can be derived from basic fairness principles. In particular, the author describes the Shapley value, the proportional sharing rule and the nucleolus. The proportional sharing rule has the advantage that it is the only rule that is invariant to mergers and splitting of the IP owners. The author also explains why, at times, there may be not acceptable to solution. Further, the author contrasts these rules with the efficient component pricing rule (ldquoECPRrdquo) suggested by Baumol and Swanson. Unlike, the ECPR, the rules identified in this paper can uniquely determine license fees when there is more than one owner of essential IP, and also incorporate various notions of fairness and equity.