23 October 2008

Refusal to Honor Licensing Commitments in Standards Setting Forums Can Be Anticompetitive

Many standards-setting organizations (SSOs) require participants to disclose patents that might be technically essential to implementing the standard being formulated, and some go further and require that participants agree to license those patents on fair, reasonable and non-discriminatory terms. The US Federal Trade Commission (FTC) earlier this year issued a decision stating that a patent holder's refusal to honor licensing commitments made in a standards setting organization constitutes an unfair method of competition, despite the fact that the patent holder lacked market power in the relevant market. The decision was reached in connection with a settlement decree with Negotiated Data Solutions LLC (N-Data).

N-Data licenses patents it acquired from National Semiconductor Corporation. N-Data's patented technology enables an Ethernet device to detect and optimize local-area network communication with any other vendor's device automatically. In 1994, the Institute of Electrical and Electronics Engineers (IEEE) adopted the IEEE 802.3 Ethernet standard. National Semiconductor was a member of the IEEE at the time, and during the formation of the standard, National disclosed that it had filed for patent protection for certain technology that could be adopted in this new standard, and offered to license such patents, should the patented invention become part of that standard, for a one-time flat fee of $1,000 for each company adopting the standard. Based on these assurances, the IEEE adopted National's technology as part of the Fast Ethernet standard.

Subsequently, N-Data "threatened to raise prices for an entire industry" by charging vendors fees in excess of the promised $1,000 one-time fee after they committed themselves to the standard, the FTC said. (Actually a predecessor to the patents at issue, Vertical Networks, began the practice, but it was continued by N-Data after the former assigned the patents to N-Data.) The FTC concluded that this ex ante "hold up" behavior constitutes an unfair business practice "likely to cause substantial injury to consumers" because IEEE members "had no way to anticipate repudiation of the price commitment". A major concern motivating the FTC was that pro-competitive standards setting efforts would be undermined if commitments by SSO members could be ignored once the patents are transferred to another company. Because later patent assignees are not in contractual privity with the standards-setting body or its members, the FTC was concerned that contract remedies would prove ineffective.

The lessons of this decision are clear for companies participating in standards setting organizations. Participants need to ensure that any offers to license technology implicated by the standard contain sufficient built-in flexibility in the event market or economic conditions warrant an adjustment to the proffered terms. And, for companies acquiring patents implicated in a standard, such companies need to perform due diligence to determine whether and to what extent the terms offered to SSO members in the past can be adjusted.

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