FTC Challenges Refusal to Meet Commitment to License Patents for “Ethernet”

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

A divided Federal Trade Commission issued a complaint alleging that Negotiated Data Solutions LLC (N-Data) engaged in unfair methods of competition and unfair acts or practices in violation of Sec. 5 of the FTC Act by enforcing certain patents against makers of equipment employing Ethernet—a computer networking standard used in nearly every computer sold in the United States.

A proposed consent order would prohibit the company from charging higher royalties for the technologies used in the standard.

Liability Under Section 5 of FTC Act

In an unusual move, the three commissioners who made up the majority—Commissioners Pamela Jones Harbour, Jon Leibowitz, and J. Thomas Rosch—found N-Data liable for its conduct under Sec. 5 of the FTC Act alone, without a concurrent determination that the conduct rose to the level of a Sherman Act violation.

Recognizing that “some may criticize the Commission for broadly (but appropriately) applying our unfairness authority to stop the conduct alleged in this Complaint,” the majority contended that the FTC’s authority to stop anticompetitive conduct that does not rise to the level of a Sherman Act violation is unique among federal agencies.

“Using our statutory authority to its fullest extent is not only consistent with the Commission's obligations, but also essential to preserving a free and dynamic marketplace,” the majority noted.

Dissenting Statements

Chairman Deborah Platt Majoras and Commissioner William E. Kovacic dissented and issued separate statements. Chairman Majoras suggested that the case departed materially from the prior FTC standard-setting “hold up” challenges and that she was not convinced that any party was injured by the challenged conduct. Commissioner Kovacic questioned the impact of the settlement on state unfairness statutes that are modeled after the FTC Act.

N-Data licenses patents that it acquires from inventors or other holders of patents. The patents involved in this matter were originally held by National Semiconductor Corporation.

Commitment to License Technology

According to the FTC's complaint, in 1994, National made a commitment to the IEEE—an electronics industry standard setting organization—that if the IEEE adopted a standard based on National’s patented NWay technology, National would offer to license the technology, for a one-time, paid-up royalty of $1,000 per licensee, to manufacturers and sellers of products that use the IEEE standard.

As alleged in the complaint, N-Data obtained the patents knowing about National’s prior commitment and after the industry became committed to the standard, but N-Data refused to comply with that commitment and instead demanded royalties far in excess of that commitment.

The action is In the Matter of Negotiated Data Solutions LLC, CCH Trade Regulation Reporter ¶16,097.