Frand Conditions - Applying the Concept of Subgame Perfect Nash Equilibria

Holders of standard-essential patents must provide access to potential licensees on fair, reasonable, and non-discriminatory terms (FRAND). In the context of industrial economics, standardization shifts the demand curve outward. On one hand, profits from standardization can flow to the owners of SEPs, since potential licensees are dependent on the respective patent (hold up). On the other hand, the licensee gains an advantage if the owner is not sufficiently compensated for his innovation and standardization costs (reverse hold up). Standardization can also increase the market power of all standard users, and thus generate excessive prices.The Huawei/ZTE ruling of the European Court of Justice prescribes a strict sequential game for SEP owners and SEP users, which they must follow step-by-step in order to make demands and submit offers. The game theoretical backward induction generates two conceivable subgame perfect solutions. Either both parties enter into negotiations with requests or offers that they consider acceptable under competition law, and the courts or third parties decide in favor of one of the two parties, or both parties overdo it—patent owners demand too much, and patent users offer too little—and the courts or third parties take the side of one of the two parties. The latter is highly problematic in terms of legal policy because the rules of the ECJ do not generate sufficient pressure to force cooperation between the parties