Patent Law

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.