Patent Law

Cash Cow Killed

By Gary Odom and Jordan Kuhn

N-Data bought 5,617,418 and 5,687,174, claiming autonegotiation Ethernet switches. The original owner, National Semiconductor, had agreed to license the patent for a song if the technology was adopted as a standard, which it was; now a widely adopted IEEE standard called NWay. Ignoring the supposed license cap, N-Data allegedly began an extortion campaign. The FTC caught wind of it, and decided to break wind on it: charging violation of 15 U.S.C. § 45, unfair competition.

The two-patent purchase was from allegedly distressed Vertical Networks, who bought the patents from National Semiconductor.

According to the FTC?s complaint, in 1994 National made a commitment to an electronics industry standard setting organization, the 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.

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 has refused to comply with that commitment and instead has demanded royalties far in excess of that commitment.

The FTC used police state intimidation to force N-Data to back down.

According to the majority, ?We recognize that some may criticize the Commission for broadly (but appropriately) applying our unfairness authority to stop the conduct alleged in this Complaint.? But the FTC?s authority to stop anticompetitive conduct that does not rise to the level of a Sherman Act violation is unique among federal agencies ? and ?the cost of ignoring this particularly pernicious problem is too high. Using our statutory authority to its fullest extent is not only consistent with the Commission's obligations, but also essential to preserving a free and dynamic marketplace.?

The FTC split 3-2 on the matter, with the FTC Chairman in the minority.

Chairman Majoras disagreed with the majority's determination of liability, stating that ?[t]his case departs materially from the prior line [of FTC standard-setting ?hold-up? challenges], in that there is no allegation that [the patent holder] engaged in improper or exclusionary conduct to induce IEEE [Institute of Electrical and Electronics Engineers] to specify its NWay technology? into the relevant standard. ?The majority has not identified a meaningful limiting principle that indicates when an action ? taken in the standard-setting context or otherwise ? will be considered an ?unfair method of competition,?? she said, adding also, ?The novel use of our consumer protection authority to protect large corporate members of a standard-setting organization is insupportable.?

About NWay Ethernet:

NWay technology enables two devices at opposite ends of a local area network (LAN) 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.

There are no heroes in this story; only goats. National Semiconductor played dumbass in selling the patents in the first place: such penny-ante licensing; juvenile not to have put the technology in the public domain if standardization was desired. N-Data was running an slimy shakedown. And the FTC acted as big brother, without regard to the law.

Sources: FTC press release and other documents.

Full post as published by The Patent Prospector on January 25, 2008 (boomark / email).