United States: Keep Your SSO Promises: What You Say Can And Will Be Used Against You

Companies involved in the research, design and development of new technologies often participate in standards setting organizations (SSOs) which focus on the standardization of such technology. Participation in SSOs allows companies to keep up-to-date on industry developments, to target product development toward standards compliant products and to steer research and intellectual property development into potential areas of future standardization. However, participation comes with obligations.

One common obligation concerns the handling of intellectual property rights (IPR). While each SSO has its own rules and regulations, virtually all have some form of IPR disclosure and licensing obligations. A first obligation typically requires disclosure of intellectual property related to a standard. A second obligation of most IPRs requires licensing on reasonable and non-discriminatory (RAND) terms to all comers that practice the standard. Traditionally, a company failing to comply with the IPR disclosure requirements of an SSO exposes itself to difficulties in enforcing its patents against participants in the standard developed by the SSO. See, e.g., Rambus Inc. v. Infineon Technologies A.G., 318 F.3d 1018 (Fed. Cir. 2003); Stambler v. Diebold, Inc., 11 U.S.PQ.2d 1709 (E.D.N.Y).

In addition, there is the possibility in certain limited instances that the government could open an investigation of a company's failure to comply with an SSO's IPR policy. For example, should a company's failure of its IPR obligations before an SSO involve antitrust issues, both the Antitrust Division of the Department of Justice and the Bureau of Competition of the Federal Trade Commission (FTC) may perform an investigation into a party's conduct. See, e.g., In re Rambus Inc., No. 9302 (F.T.C. filed June 18, 2002); In re Dell Computer Corp., 121 F.T.C. 616 (1996).

The Long Arm Of Justice Gets Longer

On January 28, 2008, the FTC in In the Matter of Negotiated Data Solutions, FTC File No. 051 0094, indicated that an antitrust violation is no longer required for it to investigate allegations of unfair competition with respect to a patent owner's assurances made to an SSO regarding its patents. This article addresses FTC's decision in In the Matter of Negotiated Data Solutions and the potential ramifications it has for participants in SSOs as well as parties seeking to license and purchase patents.

The Promise To The SSO

The Institute of Electrical and Electronics Engineers (IEEE) sits at the forefront of many telecommunications standards. In 1983, the IEEE published a standard for Ethernet, which covers the transmission of data over Local Area Networks (LAN). Ethernet has become one of the most widely implemented LAN technologies. Following the successful adoption of the Ethernet standard, in 1993 the IEEE authorized a working group to develop a new standard for Fast Ethernet that would permit much faster data transmission than that allowed for by the original standard.

The IEEE desired for devices operating under the Fast Ethernet standard to be compatible with the original Ethernet standard. National Semiconductor Corporation (National Semiconductor), a member of the working group developing the new standard, proposed a way of achieving this desired compatibility called NWay. In early 1994, at the IEEE meeting to determine which compatibility standard to include in the Fast Ethernet standard, National Semiconductor announced that if the NWay technology were adopted as the standard it would license NWay to any requesting party for a one-time RAND fee of one thousand dollars. On June 7, 1994, in a subsequent letter to the IEEE working group, National Semiconductor indicated:

After National made its licensing commitment, the IEEE adopted the NWay technology as part of its new Fast Ethernet standard.

Breaking The Promise

In 1997, U.S. Pat. Nos. 5,617,418 and 5,687,174 (Patents) were issued to National Semiconductor concerning the NWay technology. The Patents were each based upon a common application filed in 1992, prior to the assurances made by National Semiconductor concerning NWay to the SSO. The Patents were assigned to Vertical Networks, Inc. (Vertical) in 1998.

In an effort to increase its licensing revenue, Vertical sought to alter the terms of National Semiconductor's licensing commitment to the IEEE SSO. In furtherance of this purpose, Vertical sent letters notifying sixty-four target companies of the patents and demanding a license fee on a per unit basis. Vertical further threatened or initiated legal action against companies that refused to pay the license fee it demanded, which was far in excess of the $1,000 paid up royalty promised by National Semiconductor. In November 2003, Vertical assigned the Patents to Negotiated Data Solutions LLC ("Negotiated Data") and went out of business. Negotiated Data continued Vertical's efforts to assert the Patents against companies employing the Fast Ethernet standard.

Uncle Sam Says Keep Your Promises

On January 28, 2008, the FTC, in a 3-2 opinion, found that Negotiated Data engaged in unfair methods of competition and unfair trade practices in violation of Section 5 of the FTC Act. In the Matter of Negotiated Data Solutions, FTC File No. 051 0094 dated January 28, 2008, Statement of Commission. The finding was based upon Negotiated Data's conduct in refusing to abide by the terms of the licensing arrangement offered by National Semiconductor. Contrary to prior actions by the FTC in similar situations, the FTC did not allege that Negotiated Data's actions resulted in an antitrust violation. Instead, it based the complaint on the harm to companies relying on the Fast Ethernet standard and National Semiconductor's representations regarding the licensing of the Patents.

In electing to exercise its jurisdiction under the FTC Act, the commission noted that the actions of Negotiated Data "could be enormously harmful to standard-setting." Id. at 1. It further emphasized that if Negotiated Data's "conduct became the accepted way of doing business, even the most diligent standard-setting organizations would not be able to rely on the good faith assurances of respected companies" due to the possibility that those companies could assign their ownership interests in any subject patents to other companies who would not be obligated to abide by any representations made before the SSO. Id.

In finding that Negotiated Data's actions amounted to an "unfair method of competition" the FTC first addressed its authority to challenge Negotiated Data in the absence of allegations with respect to a violation of antitrust laws. Specifically, the commission noted that in establishing the FTC Congress granted it the right to regulate conduct that was unjust, inequitable or dishonest. Id. at 2. It further noted that the Supreme Court of the United States found that the standard for "unfairness" under the FTC Act "encompass[es] not only practices that violate the Sherman Act and the other antitrust laws, but also practices that the Commission determines are against public policy for other reasons." Id. at 2 (quoting F.T.C. v. Ind. Fed'n of Dentists, 476 U.S. 477, 454 (1986).

After determining that it had jurisdiction to regulate the conduct of Negotiated Data, the FTC found that the actions of Negotiated Data resulted in an unfair method of competition in light of the harm to consumers and the importance of SSOs to the economy. The FTC described SSOs as "one of the engines driving the modern economy" and commented that the actions of companies like Negotiated Data "threatens to stall that engine." Id. at 2-3. In light of this, it found that deceptive practices in the process of establishing a standard could undermine competition in an entire industry.

The commission also found Negotiated Data's actions to be an "unfair act or practice" under Section 5(n) of the FTC Act. The FTC found jurisdiction appropriate under Section 5(n) because Negotiated Data's conduct "victimizes businesses (as well as individuals) who are consumers." Id. at 3. The FTC explicitly recognized the criticism it would be exposed to by exercising jurisdiction in the absence of an antitrust violation but found "the cost of ignoring this particularly pernicious problem is too high." Id.

Two dissents were filed to the statement of the FTC. In the Matter of Negotiated Data Solutions, FTC File No. 051 0094 dated January 28, 2008, Dissenting Statement of Chairman Majoras (Majoras Dissent); In the Matter of Negotiated Data Solutions, FTC File No. 051 0094 dated January 28, 2008, Dissenting Statement of Williams E. Kovacic (Kovacic Dissent). Each dissent criticizes the majority for exercising jurisdiction in the absence of a violation of antitrust laws. Majoras Dissent at 1-2; Kovacic Dissent at 1-2.

The Majoras Dissent addressed the failure of the majority to identify a "meaningful limiting principal" indicating when an action, taken in the context of a standard setting organization or otherwise, will be considered an "unfair method of competition." Majoras Dissent at 4. It further urged that the antitrust laws are sufficiently encompassing to address "all matters that properly warrant competition policy enforcement" and that the FTC should not exercise its discretion to consider matters outside of these laws. Id. at 3. In criticizing the majority, the Majoras dissent noted that once the FTC elects to considers matters that do not amount to antitrust violations "we are headed down a slippery slope." Id. Similarly, the Kovacic dissent criticized the over-reaching nature of the majority's decision noting that "it seems that the Commission's view of fairness would permit the FTC in the future to plead all of what would have been seen as competition-related infringements as constituting unfair acts or practices." Kovacic Dissent at 3.

The Promises Run With The Patent

The FTC's decision in In the Matter of Negotiated Data Solutions has potential repercussions not only for companies that participate in SSOs but for any company that licenses or purchases technology.

The FTC decision explicitly recognizes the importance of SSOs to the economy and the obligation of participants to follow the IPR guidelines of SSOs. Participants in an SSO must be aware of its IPR guidelines and should consistently monitor and keep abreast of any intellectual property developments that may affect the standards being discussed by the SSO. Furthermore, the decision of the FTC makes clear that any assurances made to an SSO regarding the licensing of a patent will encumber the subject patent even after its sale or assignment. Thus, participants in an SSO must exercise caution when making assurances to the SSO regarding patents. Specifically, if possible under the IPR of an SSO, participants must avoid setting a ceiling or cap with respect to royalty rates in communications with an SSO. Caps or ceilings are likely to result in a diminished value of the subject patents in the event a participant seeks to subsequently sell its rights to the patents at issue. Furthermore, participants in SSOs should carefully monitor and track any assurances made by others with respect to rights in patents concerning the SSO.

The FTC's decision further affects licensees with respect to rights in a patent. Specifically, potential licensees should undertake due diligence to ensure that any patents are not encumbered by statements made to an SSO. Typically, any such statements are publicly available through the particular SSO and may be searched to determine whether any licenses are necessary to practice a standard. In the event a potential licensee determines that a licensor made assurances concerning the patent at issue to an SSO, the potential licensee should seek to hold the potential licensor to any such promises.

In addition, the FTC's decision affects parties seeking to purchase patents related to standards set by SSOs. When seeking to acquire patented technology, the due diligence process should specifically include an investigation and request of information concerning the participation of the patent owner, and any predecessors in interest, in any SSOs. Furthermore, representations and warranties concerning the absence of promises made to SSOs should be negotiated as part of a company's patent purchasing practice. The failure to include appropriate representations and warranties could leave a purchaser without a remedy in the event assurances were made to an SSO and the purchaser was unaware of this at the time it acquired the patent.

While the FTC's decision in Negotiated Data represents an additional consideration for SSO participants, patent owners, potential purchasers and licensees, it may well be that the FTC's reach will be found to exceed its grasp. Accord Rambus Inc. v. Federal Trade Commission, No. 07-1086, (D.C. Cir. April 22, 2008) (holding that the Commission failed to sustain its allegations of monopolization).

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