Businesses that participate in Standard Setting Organizations ("SSOs") and seek adoption of their technologies in standards now arguably face additional exposures.  Extending a line of previous SSO patent "hold-up" cases, including Dell, Unocal, and Rambus, the Federal Trade Commission has used its most recent SSO case to define a broader potential scope for liability under Section 5 of the FTC Act, 15 U.S.C. § 45.  The zone of liability now includes businesses that do not conceal their patents before SSO adoption, but later engage in "hold-up" behaviors after adoption – "ex ante," by trying to reneg on previously negotiated agreements with an SSO about the future economic terms on which the patent would be licensed if they were included in the standard.  According to at least a majority of the current FTC, the Act now appears to encompass such actions by corporations with questionable market power, and also provides the basis for additional liability under the consumer protection provisions of the Act as well as unfair competition.

Patent holders have come under repeated criticism by the Federal Trade Commission for opportunistic conduct in SSO’s when holders seek to leverage the inclusion of patented innovations in technology standards.  Some of these patent holders have been accused of engaging in "hold-ups."  This problem occurs when SSO members withhold information about their potential or presently owned patented technology.  These members then lobby for adoption of a standard relying heavily on the use of their proprietary technology.  Once the SSO adopts the standard, and other members begin to practice the standard, the "hold up" starts as the patents are revealed, and the patent holder seeks royalties for their continued use.  The members who relied on the standard have invested must time and money, making switching to alternatives economically unreasonable, potentially giving the patent holder some degree of "market power."

On January 23, 2008, the FTC announced a complaint and settlement with Negotiated Data Solutions, LLC ("N-Data"), In the Matter of Negotiated Data Solutions LLC, FTC File No. 051 0094.  The FTC concluded that N-Data violated Section 5 of the FTC Act by engaging in unfair both methods of competition and acts or practices unfair to consumers, relating to the Ethernet standards set by the Institute of Electrical and Electronics Engineers ("IEEE") for data transmission.  Specifically, the FTC found the conduct of N-Data violative of Section 5(a), which prohibits "unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce."  15 U.S.C. § 45(a)(1).  The Commission also found an alternative basis for liability under Section 5(n) of the FTC Act, which encompasses consumer protection.  The decision was split 3-2, somewhat unusual in the context of a settlement.  Of course, the settling party neither admitted nor denied liability by signing the consent decree.

The really novel aspect of this case is that unlike prior SSO "hold-up" cases – Dell, Unocal, and Rambus – in this case the defendant N-Data did not conceal the existence of patents during the SSO’s adoption process.  Rather, N-Data’s patent-holding predecessor was upfront about its patent through the entire standard setting process, agreeing to license the technology to users for $1000 per license.  The problems with N-Data set forth in the complaint arose later, when the successors to the patent, first Vertical Networks, and then N-Data, attempted to leverage its position as a necessary standardized technology by trying to renegotiate the license terms in an effort to obtain more than the original $1000 from each licensee.

The consent indicates that the anticompetitive act relating to the hold-up need not occur at the adoption phase.  At least according to a bare majority of the current Commission, the anticompetitive actions subjecting a business to Section 5 liability can occur at any time.  It is now generally accepted that the act of withholding pertinent information about possession of a patent may subject a business to Section 5 liability, under the previous "hold-up" cases.  However, this case demonstrates that the action of wielding the power conferred ex ante through adoption of a standard in order to "hold-up" adopting members can be equally actionable without the initial dishonesty in the adoption process.

The FTC Act is broader than the Sherman and Clayton Acts, but usually is limited in reach to incipient violations.  The dissent of FTC Chairman Deborah Majoras states that the conduct of N-Data was not incipient because there was no concealment and no actual market power at the time of adoption.  Majoras goes on to question whether N-Data ever enjoyed measurable market power since many users ignored N-Data’s request to pay more for licensing.  The fact that there was no initial bad act during the adoption process, and questionable impact after the "hold-up," apparently was an unacceptable expansion for the Chairman of the unfair competition provisions of Section 5.  She appeared concerned about the expansion of liability to what may be a benign license re-negotiation after adoption.

Also of significance was the FTC’s use of the consumer protection Section 5(n) of the Act as an alternative basis a claim against N-Data.  It is unusual, though not unprecedented for the FTC to use consumer protection to reach anticompetitive conduct.  Chairman Majoras’ dissent raised serious questions about the use of the consumer protection section for major corporations.  The Chairman put substantial emphasis on the identification of a corporation as a consumer, but failed to note that the majority also addressed the downstream effects to individual purchasers of technology.  The majority expressly acknowledged concern for downstream impact to consumers: "[O]ften in [these] contexts, the licensees have an incentive to pass along higher costs to the ultimate consumers who purchase the products."  It is arguable that without the impact downstream, there could be no liability under this provision, but that is not expressly stated by the FTC.  At a minimum, this opinion demonstrates that corporations and downstream consumers are both of concern, at least in the "hold-up" context.

Going forward, practitioners will be looking to the FTC to see the application of Section 5 in future cases, in light of the apparently broad new interpretation and the 3-2 decision split.  Practitioners will also look to see if companies will start to be prosecuted under the consumer protection provisions of the Act.  Until more cases appear, businesses involved with SSOs should be even more cautious and candid in negotiations with SSOs.  These businesses must also be extremely careful ex ante as well, because it appears there are new ways to be found liable under Section 5 of the FTC Act, well beyond any liability under the Sherman Act and Clayton Act.  The working assumption must be that disputes arising from agreements with SSO’s concerning future licensing will result not just in breach of contract or patent infringement litigation, but unfair competition and consumer protection exposure as well.

Authored by:

David R. Garcia



Angela J. Clifford