FTC Asserts Antitrust Authority on Patent Licenses in Standardized Technologies

In the Matter of Negotiated Data Solutions LLC (File No. 0510094)

In an unusual move, the Federal Trade Commission decided in a 3-2 ruling that the FTC had the authority to file a complaint against company Negotiated Data Solutions ("N-Data") for allegedly charging "excess" licensing royalties for patents related to Ethernet technology in violation of Section 5 of the FTC Act. N-Data obtained the Ethernet-related patents from National Semiconductor Corp, who previously agreed to let the IEEE incorporate them into its Ethernet Standard in exchange for one-time royalties of $1,000 per license. Now, N-Data is trying to increase the royalty payment. According to the FTC's complaint:

The Complaint in this matter alleges that N-Data reneged on a prior licensing commitment to a standard-setting body and thereby was able to increase the price of an Ethernet technology used by almost every American consumer who owns a computer. Based on the facts developed by staff during the investigation, we find reason to believe that this conduct violated Section 5 of the FTC Act.

The impact of Respondent’s alleged actions, if not stopped, could be enormously harmful to standard-setting. Standard-setting organization participants have long worried about the impact of firms failing to disclose their intellectual property until after industry lock-in. Many standard-setting organizations have begun to develop policies to deal with that problem. But if N-Data’s conduct became the accepted way of doing business, even the most diligent standard-setting organizations would not be able to rely on the good faith assurances of respected companies. The possibility exists that those companies would exit the business, and that their patent portfolios would make their way to others who are less interested in honoring commitments than in exploiting industry lock-in. Congress created the Commission precisely to
challenge just this sort of conduct.

The Commission accepted a proposed consent agreement premised on two separate violations: (1) N-Data’s alleged conduct was an unfair method of competition, and (2) their conduct was also an unfair act or practice. Notably, the FTC did not pursue the action under traditional Sherman Act principles, but under "broader authorities" vested in the Commission. Noted the Commission:

We recognize that some may criticize the Commission for broadly (but appropriately) applying our unfairness authority to stop the conduct alleged in this Complaint. But the cost of ignoring this particularly pernicious problem is too high. 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.

Read the Statement of the Commission here (link)

Read dissenting statements of Chairman Majoras (link) and Kovacic (link)