Tuesday, June 03, 2008

FTC Looking to Break Down "Patent Walls" For Standardized Technologies

Federal Trade Commission (FTC) Commissioner J. Thomas Rosch presented a speech before the Newport Summit on Antitrust and Economics on May 31, where he discussed the effect of "patent trolls", standardized technologies, and potentially anticompetitive "patent walls", where

[A] firm independently develops and manufactures a product that competes in what constitutes a relevant market for antitrust purposes, and then files multiple patent applications covering certain features of the product and the patents issue. After competing products are brought to market, the firm acquires additional patents from third parties. It then uses those patents, and its prior existing patents, to threaten its present and potential competitors with litigation and “build a wall” around the market, eliminating competition and preventing entry.
According to Rosch, the FTC has been looking more closely at two "viable enforcement tools"to curb such activities: Section 5 of the FTC Act, and Section 7 of the Clayton act and Sherman Act.

Under the Supreme Court's ruling in FTC v. Sperry & Hutchinson Co., section 5 of the FTC Act was given an expansive reading to empower the Commission to “define and proscribe an unfair competitive practice, even though the practice does not infringe either the letter or spirit or the antitrust laws” and to “proscribe practices as unfair . . . in their effect on competition.” While previous section 5 FTC actions dealt more with "invitation to collude" situations and facilitating practices, the FTC clearly has now started focusing more on patent practices, particularly in the context of standardized technologies.

In January of 2008, the FTC filed 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. After N-Data tried to "renege" on the original agreement, and tried to increase the royalty payment, the FTC decided to take action. According to the complaint:
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.
(See earlier 271 Blog coverage here). The Commission emphasized that it was the standard setting context that was crucial to its finding of an unfair method of competition, and that a mere departure from a previous licensing commitment is unlikely to constitute an unfair method of competition. However, according to Rosch, "[s]tandard setting displaces the normal give and take of competition, thus any subversion of that process can have extremely detrimental effects on competition."

Regarding "patent wall" situations, Rosch suggested that "Section 7 of the Clayton Act and the Sherman Act are viable law enforcement tools in this scenario."
In fact, this is not a new scenario. In United States v. Singer Manufacturing Co., the Supreme Court held that, in the context of a broad monopolistic scheme, the transfer of a patent from a Swiss manufacturer to its U.S. licensee to facilitate bringing infringement actions against Japanese competitors violated Section 1. Similarly, in Kobe, Inc. v. Dempsey Pump Co., the Tenth Circuit found the acquisition, nonuse and enforcement of "every important patent" in the field with a purpose to exclude competition, together with other anticompetitive acts, constituted a violation of Section 2. And in Xerox Corp., the Commission entered into a consent decree with Xerox settling a Commission challenge to Xerox's acquisition of the Battelle patents on plain paper copiers allegedly with the purpose and effect of monopolizing the plain paper copier market.
While acknowledging that such actions aren't "bullet-proof" and that additional policy concerns exist, Rosch suggested that the FTC would consider filing such actions after a “careful, intense factual investigation" reveals that "anticompetitive combinations of innovation efforts” are afoot.


- Read Rosch's speech in its entirety here.

- See Rosch's speech from April 2007 on Pharmaceutical Antitrust issues here.

- See FTC study "To Promote Innovation: The Proper Balance of
Competition and Intellectual Property Law and Policy" (Oct. 2003) (link)

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