FTC Consent Order on Breach of Patent Licensing Commitment Made During Standards-Setting

In In the Matter of Negotiated Data Solutions LLC., the U.S. Federal Trade Commission found reason to believe that breach of a ptent licensing commitmnet made during standards-setting violated Section 5 of the FTC Act, standing alone, as an unfair method of competition and an unfair act or practice. The Statement of the Commission recognized that

[S]ome 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.

According to the FTC's complaint, N-Data was engaged in the business of licensing patents that it has acquired from National Semiconductor Corporation (National). In 1994 National had made a commitment to an electronics industry standard setting organization, the IEEE, 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. N-Data obtained the patents knowing about National’s prior commitment and after the industry became committed to the standard, but N-Data has refused to comply with that commitment and instead has demanded royalties in excess of that commitment.

The complaint further alleged that because N-Data began demanding royalties after it became expensive and difficult for the industry to switch to another standard, N-Data was able to demand higher royalties than the industry otherwise would have paid for the technologies. The complaint also alleged that consumers would be harmed because of N-Data’s conduct for a number of reasons, including that firms would be less likely to assist in the development of industry standards, and that many firms would be unwilling to rely on such standards even if they were developed.

According to the Commission's Analysis of Proposed Consent Order to Aid Public Comment,

A mere departure from a previous licensing commitment is unlikely to constitute
an unfair method of competition under Section 5. The commitment here was in the context of standard-setting. The Supreme Court repeatedly has recognized the procompetitive potential of standard-setting activities. However, because a standard may displace the normal give and take of competition, the Court has not hesitated to impose antitrust liability on conduct that threatens to undermine the standard-setting process or to render it anticompetitive. See Standard Sanitary Mfg. Co. v. United States, 226 U.S. 20, 41 (1912); Allied Tube & 7 Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 500 (1989); Am. Soc’y of Mech. Engineers, Inc. v. Hydrolevel Corp., 456 U.S. 556, 571 (1982). The conduct of N-Data. . . at issue here clearly has that potential.

FOOTNOTE 8: It is worth noting that, because the proposed complaint alleges stand-alone violations of Section 5 rather than violations of Section 5 that are premised on violations of the Sherman Act, this action is not likely to lead to well-founded treble damage antitrust claims in federal court. See Herbert Hovenkamp, Federal Antitrust Policy at 588 (2d ed. 1999).

. . . Clearly, merely breaching a prior commitment is not enough to constitute an unfair act or practice under Section 5. The standard-setting context in which National made its commitment is critical to the legal analysis. As described above, the lock-in effect resulting from adoption of the NWay patent in the standard and its widespread use are important factors in this case. In addition, the established public policy of supporting efficient standard-setting activities is an important consideration in this case. Similarly, it must be stressed that not all breaches of commitments made by owners of intellectual property during a standard-setting process will constitute an unfair act or practice under Section 5. For example, if the commitment were immaterial to the adoption of the standard or if those practicing the standard could exercise countermeasures to avoid injury from the breach, the statutory requirements most likely would not be met. Finally, it needs to be emphasized that not all departures from those commitments will be treated as a breach. The Orkin court suggested that there might be a distinction between an open-ended commitment and a contract having a fixed duration. That distinction does not apply here because the context of the commitment made it plain that it was for the duration of National’s patents. However, most such commitments, including the one here, are simply to offer the terms specified. Indeed, those principles are reflected in the remedy set forth in the consent decree.

N-Data settled the charges and was placed under a consent order prohibiting it from enforcing the patents unless it has first offered the patent license attached to the order. Specifically, N-Data must offer a paid-up, royalty-free license to the Relevant Patents in the Licensed Field of Use in exchange for a one-time fee of $1,000. However, if an offeree has failed to accept such an offer within 120 days, the Proposed Consent Order allows N-Data to sue to enforce the Relevant Patents. At the time N-Data files suit, however, it must make a second offer providing a prospective licensee with an opportunity to accept the patent license specified by the order in return for a payment of thirty-five thousand dollars ($35,000).

The order will be subject to public comment for 30 days, until February 22, 2008, after which the Commission will decide whether to make it final. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Dissenting Commission Chairman Majoras disagreed with the majority's determination of liability, stating that

“[t]his case departs materially from the prior line [of FTC standard-setting ‘hold-up’ challenges], in that there is no allegation that [the patent holder] engaged in improper or exclusionary conduct to induce IEEE [Institute of Electrical and Electronics Engineers] to specify its NWay technology” into the relevant standard. “The majority has not identified a meaningful limiting principle that indicates when an action – taken in the standard-setting context or otherwise – will be considered an ‘unfair method of competition,’” she said, adding also, “The novel use of our consumer protection authority to protect large corporate members of a standard-setting organization is insupportable.”