InsideCounsel » May 2008
Commission Control
FTC plays watchdog over IP owners, protects standard-setting.
There is no practical alternative to the Ethernet standard, which enables machines to communicate
in local area networks. Used in nearly every computer in the country, both computer makers and users are locked into the standard. It goes without saying, then, that the patents covering part of that standard are crucial.
Not surprisingly, the owner of these patents, Negotiated Data Solutions (NDS), decided to take advantage of the situation by demanding more money from companies that wanted to build or sell computers capable of Ethernet communication.
But the Chicago-based company had one small problem: It wasn’t supposed to increase its licensing fees. This was part of a quid pro quo with the Institute of Electrical and Electronics Engineers (IEEE), the independent standard-setting body that set up the Ethernet standard in 1994. The IEEE incorporated the patented technology into the standard only after the patentee gave assurances it would license the technology for a flat fee of $1,000 to anyone who asked.
Eight years later, the patentee renegotiated its deal with the IEEE and then increased its royalty rates for licensees. While the IEEE didn’t object to this, the Federal Trade Commission (FTC) did, and it went after NDS.
In January, the FTC announced a controversial consent decree with NDS that effectively forces the patent owner to revert to the original $1,000 royalty. This groundbreaking action markedly expands the scope of the FTC’s enforcement powers and signals that the agency will more actively police the way IP owners exploit their rights, according to many legal experts. But it is unclear how far this new oversight will go.
“My sense is that the FTC recognizes competition is affected by the bad behavior of IP owners, and it is trying to draw some lines around the absolute power that IP owners claim they have to license their property,” says Carole Handler, an IP litigator at Foley & Lardner. “We may be seeing that the absolute right to exploit IP is limited not just by antitrust considerations, but also by unfair competition.”
Sectioned Off
The consent decree with NDS is a significant departure from prior FTC actions, according to many legal experts. In the past, the agency has acted almost exclusively against those who violate or seek to violate antitrust law. In this case, however, NDS’s actions raised no antitrust issues. The agency found merely that NDS’s price increase violated Section 5 of the FTC Act, which says unfair methods of competition and unfair acts or practices are unlawful.
For years the FTC has asserted that Section 5 lets it to go beyond the realm of antitrust violations. This interpretation is disputed, however, by the Justice Department and many antitrust experts.
Many experts are concerned that if Section 5 is cut loose from antitrust law, there will be no clear standards for determining when activity is unfair. “Does this empower future commissions to reach out and stop whatever they think is inappropriate?” asks A. Douglas Melamed, an antitrust partner at Wilmer Cutler Pickering Hale and Dorr. Melamed represents NDS in this matter.
“Section 5 sets no limits on what one can and can’t do,” says Geraldine Alexis, an antitrust litigator at Perkins Coie. “So how can in-house counsel advise their internal clients about what they can and can’t do?”
