Federal Trade Commission Takes Jurisdiction Of Intellectual Property Practices Without Charging Antitrust Violation

On January 23, 2008, the Federal Trade Commission announced a stipulated settlement with Negotiated Data Solutions LLC (N-Data) curtailing N-Data's efforts to license its patents relating to Ethernet, an almost universally used computer networking standard, on terms different than those that had been promised before the standard was adopted. The Commission, by a 3-to-2 majority, found that N-Data's efforts to obtain more favorable terms constituted an "unfair method of competition" and an "unfair or deceptive act or practice" in violation of Section 5 of the Federal Trade Commission Act, 15 U.S.C. 45, although no antitrust violation was charged. In re Negotiated Data Solutions, LLC, File No. 510094 (Negotiated Data). The Commission's actions may presage far greater Commission enforcement of intellectual property (IP) licensing assurances made by parties involved in standard-setting organizations than has been true in the past as well as a more active role for the Commission in IP issues generally.

The Commission's actions in Negotiated Data are particularly notable for several reasons. First, the Commission has in the past addressed IP issues sparingly under its Section 5 unfair competition authority; thus, its actions may signal an important new enforcement trend. Those that it has addressed have involved alleged misuse of the standard setting process by failing to disclose patents relating to the standard. In re Rambus Corp., Docket No. 9302 (2006), appeal pending, Docket Nos. 07-1086, 07-1124 (D.C. Cir. 2007); In re Union Oil Co. of Cal., Docket No. 9305 (2005); In re Dell Computer Corp., 121 F.T.C. 616 (1996). The Commission has scrutinized standard setting because it displaces competition and manipulation of the standard-setting process can adversely affect an entire industry.

Second, in contrast to Negotiated Data, the Commission's earlier cases focused on the antitrust issues inherent in a patent holder's subversion of the standard-setting process. But in Negotiated Data, the Commission found N-Data liable under Section 5 without any concurrent determination that N-Data's conduct had violated the Sherman Act or the Clayton Act. The majority recognized its own departure from the past, observing that "some may criticize the Commission for broadly (but appropriately) applying our unfairness authority to stop the conduct alleged in this complaint," but it concluded that "the cost of ignoring this particularly pernicious problem is too high."

The Commission's decision suggests that its...