IEEE Standards: FTC Finds Patent Enforcement "Unfair Competition" Based on Patentee's Prior Offers to License

Federal Trade Commission v. N-Data (FTC Complaint and Settlement 2008)

The FTC has announced both a complaint and settlement with the patent enforcement company N-Data. 

N-Data had purchased Patent Nos. 5,617,418 and 5,687,174 from a distressed company (Vertical Networks) who had received the patents from National Semiconductor.  Both patents related to NWay ethernet technology that has become an IEEE standard. 

An Encumbrance: National was interested in having its technology adopted as an IEEE standard. Consequently, prior to assigning away its patent rights, National wrote to the IEEE with a promise to “offer to license its NWay technology to any requesting party …. on a nondiscriminatory basis” for a one-time fee of $1,000. The evidence showed that each party in the chain of patent title were aware of those statements at the time of transfer.  Soon after the promise, IEEE adopted the NWay standard.

Enforcement: Despite the $1,000 license promise by its predecessor, Vertical (and subsequently N-Data) began enforcement proceedings — asking rather for a reasonable royalty totaling approximately $20 million per year.

FTC Complaint:  In a 3–2 decision, the five-member FTC voted to issue a complaint against N-Data’s activities under Section 5 of the FTC Act.  That section provides the Commission with authority to stop unfair methods of competition and deceptive commercial practices.  The Majority opinion particularly noted the problem of “lock-in”: “Respondent engaged in conduct that was both oppressive and coercive when it engaged in efforts to exploit licensees that were locked into a technology by the adoption of a standard.” 

This holding is notable because there is no finding that N-Data had monopoly power or any antitrust liability. Consequently, Chairman Majoras (writing in dissent) had difficulty finding any oppression.  Majoras likewise had difficulty characterizing the sophisticated corporate players on the IEEE committee as “victims.” “The novel use of our consumer protection authority to protect large corporate members of a standard-setting organization is insupportable.”

N-Data chose not to fight and has agreed to the majority findings.

Comments

[examiner#6k]

Open and closed good judicial work. Though I feel for the minority voters opinions I can't see that those opinions would lead me to vote as they did, it really doesn't matter if they have monopoly or the others have omg awesome status, they (all the patent holders) used bs to get a standard adopted and then tried to bilk money out of the people they got to use the standard. That's the most ridiculous thing I've seen tried in litigation this week, maybe this month.

[I fought the law.....]

When was the standard adopted vis-a-vis the transfers? Do promises, offers, etc. follow a patent around so that an assignee stands in the shoes of prior owners? Sounds like sloppy practices all around.

[CliveFenster]

I fought ... writes: "When was the standard adopted vis-a-vis the transfers? Do promises, offers, etc. follow a patent around so that an assignee stands in the shoes of prior owners?"

I don't believe the timing of standards adoption v. transfers matters. As a part of its participant in the standards Working Group, National tendered the $1000 neutral license fee offer. National reiterated that offer in writing to the IEEE when the Working Group handed up its recommendations. If National hadn't made that offer, their technology may well have been passed over in favor of a different standard. The offer was known to run with the patent in each of the successive transfers -- the evidence is that both Vertical and N-Data knew of it when they acquired title.

I'm not sure why N-Data tried to enforce the patent, knowing of that license obligation. Perhaps they hoped they could bully defendants unwilling to pay the fees to defend? And I wonder if N-Data's status as NPE had an adverse impact with the FTC.

[CaveMan]

Right result for the wrong reason...

I don't like the precedent set here for the FTC to heavy handedly apply a commercial practices act, when on its face, this seems to be a pure contract issue. But to a hammer (FTC), every problem looks like a nail(unfair practice)...

[KIM]

I don't like the precedent here. It looks like an unnecessary expansion of FTC powers. This situtaion could easly have been dealt with using standard equitable principles - reliance estoppel etc - without the FTC expanding their power to meddle with trade practices between corporate entities.

[RStern]

KIM says thst "the FTC [shouldn't] expand[] their power to meddle with trade practices between corporate entities." It has long been the law that unfair trade practice statutes protect businessmen from unscrupulous businessmen, so that no _expansion_ is occurring here. As for the wisdom of doing so, why shouldn't corporate citizens receive equal protection of the law? If you prick a businessman, does he not bleed? -- Furthermore, as the FTC majority pointed out, N-Data's gouging gets passed on to consumers of electronic equipment, so that the FTC is protecting the public by protecting computer manufacturers, here. In addition, N-Data's abuse of the IEEE's standardization program discourages standardization efforts and thus hurts the public's interest in promoting standardization. Just because a beneficiary of the FTC's enforcement is a corporation doesn't make it a bad idea.

[Alun Palmer]

This reminds me of the RAMbus case (spelling?), except in that case they got the standard adopted by JEDEC and later revealed they had patents covering it, which was bad faith.

Here, it seems that the IEEE adopted the standard in reliance on the expectation of a flat $1,000 licence for each licencee, so I would say that the successors and assigns should be bound to that in contract, but you see I'm only a patent agent, so how should I know if that's a correct reading of contract law? Does buying the patents make you a successor to the contract?

[Duckweed]

The FTC was also heavily involved in the RAMbus cases, with concurrent civil patent/contract/fraud litigation in the district court. http://www.ftc.gov/opa/2006/08/rambus.shtm
Hynix Semiconductor v. Rambus, Inc., 441 F.Supp.2d 1066. Rambus v. Infineon, 318 F.3d 1081 (Fed. Cir. 2003).
Reading the RAMbus court cases is torture--you think the rogue player should lose for gaming the system. However, the Fed. Cir. reversed jury's finding for the manufactures because Fed. Cir. didn't think there was any contractual obligation between parties who sat down to form a standard together. So breach of contract is out.

Old-fashioned reliance law may be hard to prove when a manufacuturer who, by adopting the "industry standard", accidentally incorporated the patented features, if that manufacturer is not part of the original standard setting effort. The organization might have been mislead by the patent owner, but the manufacturer may not be able to prove reliance. So the good guys don't always come out on top in district courts, due to the complex relationship between a standard setting organization, its members, and non-member industry players.

In general, DOJ/Anti-trust division does review the conduct of standard setting organizations because of price-fixing/colusion concerns. http://www.usdoj.gov/atr/public/press_releases/2006/219379.htm

So, while FTC's involvement may be a doctrinal stretch, it is not new or evil in the situations I have read so far. Without FTC, the manufacturers may have to pay hundrens of thousands just to make a totally improper claim go away.

[Patent Enforcement]

Of course N data will enforce the patent, as this is a given thing to do. Though I too am not sure if buying the patent readily makes you a successor of the contract. Then again, isn't that the given thing? if all else is acted in good faith?