FTC Splits on Ethernet Standard-Setting Patent Complaint
The FTC said federal regulators can’t let companies buy patents that are part of the Ethernet standard, then jack up royalties. The Commission settled with a company it accused of breaking U.S. law by revisiting an agreement with the IEEE. In a rare split decision, the Commission settled charges that Chicago-based Negotiated Data Solutions violated the FTC Act but not antitrust law, a graver charge. Two Republicans among the five commissioners dissented, including the chairman.
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Negotiated Data Solutions licenses patents it acquires from inventors and others. The patents in this case began with Vertical Networks, an offshoot of National Semiconductor. In 1994, National made a commitment to the IEEE that if the IEEE adopted a standard based on the company’s patented NWay technology, National would license the technology for a one-time, paid-up royalty of $1,000 a licensee, to makers and sellers of products using it. NWay lets devices at opposite ends of a LAN link exchange data and automatically configure themselves to optimize communication, a process sometimes referred to as “autonegotiation.”
N-Data acquired the patents knowing National’s commitment and after the industry embraced the standard, the FTC said. It accused N-Data of inflating royalties and exploiting the standard. That would make consumers pay more and discourage companies from helping to develop industry standards, the commission said. If that precedent prevailed, standards-setting bodies might avoid intellectual property entirely, “potentially reducing the technical merit of those standards as well as their ultimate value to consumers,” the FTC said.
The FTC voted 3-2, with Democratic Commissioners Pamela Harbour and Jon Leibowitz and Republican Thomas Rosch in the majority and Republican Chairman Deborah Majoras and Commissioner William Kovacic dissenting. The majority acknowledged that “some may criticize the Commission for broadly (but appropriately) applying our unfairness authority to stop the conduct” alleged against N-Data. But the FTC’s authority to stop this type of anti-competitive conduct is “unique” among federal agencies and “the cost of ignoring this particularly pernicious problem is too high,” the majority said. The process is “essential to preserving a free and dynamic marketplace.”
Majoras said the case “departs materially” from other standards-setting challenges by not alleging that N-Data had engaged in “improper or exclusionary conduct to induce IEEE to specify” NWay technology “into the relevant standard.” She said the majority failed to identify “a meaningful limiting principle that indicates when an action… will be considered an ‘unfair method of competition.'” The FTC’s “novel use” of consumer protection authority “to protect large corporate members of a standard-setting organization is insupportable,” she said.
Under the settlement, Negotiated Data Solutions can’t enforce the Ethernet patents without first offering a license on the 1994 terms. N-Data didn’t respond by deadline to our request for comment.
Interaction between N-Data and the IEEE in 2002 was well documented and in good faith, an N-Data spokesman told us. Vertical and later N-Data believed that they could offer licenses under “reasonable and non-discriminatory” terms. Dell “did not like” the new terms and “rather than negotiate they petitioned the FTC to take action against N-Data,” he said. Dell couldn’t be reached for comment by deadline.