Antitrust Lawyer Blog Commentary on Current Developments

FTC CHALLENGES ‘ETHERNET’ STANDARD USED IN PERSONAL COMPUTERS

On January 24, 2008 the Federal Trade Commission (“FTC”) or (“Commission”) announced a complaint and settlement with Negotiated Data Solutions LLC (N-Data), which allegedly violated federal law by engaging in unfair methods of competition and unfair acts or practices regarding its enforcement of certain patents against makers of equipment employing Ethernet, a computer networking standard used in nearly every computer sold in the United States.
The settlement will protect consumers from higher prices and ensure competition by preventing the company from charging higher royalties for the technologies used in the standard. The Commission found N-Data liable for its conduct under Section 5 of the FTC Act, alone, without a concurrent determination that the conduct rose to the level of a Sherman Act violation. The vote was 3-2 with Commissioners Pamela Jones Harbour, Jon Leibowitz, and J. Thomas Rosch in the majority and Chairman Deborah Platt Majoras and Commissioner William E. Kovacic dissenting and issuing separate statements.

N-Data, based in Chicago, is engaged in the business of licensing patents it acquired from inventors or other holders of patents. The patents involved in this matter were originally held by National Semiconductor Corporation (“National”). According to the FTC’s complaint, in 1994, National made a commitment to an electronics industry standard setting organization, the Institute of Electrical and Electronics Engineers (“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.

NWay technology enables two devices at opposite ends of a local area network link to exchange information and automatically configure themselves to optimize their communication. This process is sometimes referred to as “autonegotiation.” Standardizing on a single autonegotiation technology allowed devices made by different manufacturers to work with one another and with different generations of Ethernet equipment.

As alleged in the complaint, N-Data obtained the patents knowing about National’s prior commitment and after the industry became committed to the standard, but N-Data refused to comply with that commitment and instead has demanded royalties far in excess of that commitment. The complaint alleges 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 alleges 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. In addition, the complaint alleges that consumers would be forced to pay higher prices because of N-Data’s conduct.

N-Data settled the charges and will be placed under an order prohibiting it from enforcing the patents unless it first offered the patent license attached to the order, which is based on the terms offered in 1994, before the patented technology was incorporated into the Ethernet standard.

Robert Doyle
(202) 589-1834
rdoyle@dbmlawgroup.com