[Federal Register Volume 73, Number 21 (Thursday, January 31, 2008)]
[Notices]
[Pages 5846-5855]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-1801]


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FEDERAL TRADE COMMISSION

[File No. 051 0094]


Negotiated Data Solutions LLC; Analysis of Proposed Consent Order 
to Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed Consent Agreement.

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SUMMARY: The consent agreement in this matter settles alleged 
violations of federal law prohibiting unfair or deceptive acts or 
practices or unfair methods of competition. The attached Analysis to 
Aid Public Comment describes both the allegations in the draft 
complaint and the terms of the consent order--embodied in the consent 
agreement--that would settle these allegations.

DATES: Comments must be received on or before February 22, 2008.

ADDRESSES: Interested parties are invited to submit written comments. 
Comments should refer to ``Negotiated Data Solutions, File No. 051 
0094,'' to facilitate the organization of comments. A comment filed in 
paper form should include this reference both in the text and on the 
envelope, and should be mailed or delivered to the following address: 
Federal Trade Commission/Office of the Secretary, Room 135-H (Annex D), 
Pennsylvania Avenue, NW, Washington, D.C. 20580. Comments containing 
confidential material must be filed in paper form, must be clearly 
labeled ``Confidential,'' and must comply with Commission Rule 4.9(c). 
16 CFR 4.9(c) (2005).\1\ The FTC is requesting that any comment filed 
in paper form be sent by courier or overnight service, if possible, 
because U.S. postal mail in the Washington area and at the Commission 
is subject to delay due to heightened security

[[Page 5847]]

precautions. Comments that do not contain any nonpublic information may 
instead be filed in electronic form by following the instructions on 
the web-based form at http://secure.commentworks.com/ftc-NegotiatedDataSolutions. To ensure that the Commission considers an 
electronic comment, you must file it on that web-based form.
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    \1\ The comment must be accompanied by an explicit request for 
confidential treatment, including the factual and legal basis for 
the request, and must identify the specific portions of the comment 
to be withheld from the public record. The request will be granted 
or denied by the Commission's General Counsel, consistent with 
applicable law and the public interest. See Commission Rule 4.9(c), 
16 CFR 4.9(c).
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    The FTC Act and other laws the Commission administers permit the 
collection of public comments to consider and use in this proceeding as 
appropriate. All timely and responsive public comments, whether filed 
in paper or electronic form, will be considered by the Commission, and 
will be available to the public on the FTC website, to the extent 
practicable, at www.ftc.gov. As a matter of discretion, the FTC makes 
every effort to remove home contact information for individuals from 
the public comments it receives before placing those comments on the 
FTC website. More information, including routine uses permitted by the 
Privacy Act, may be found in the FTC's privacy policy, at http://www.ftc.gov/ftc/privacy.htm.

FOR FURTHER INFORMATION CONTACT: Kent E. Cox (202) 326-2058, Bureau of 
Competition, Room NJ-6213, 600 Pennsylvania Avenue, NW, Washington, 
D.C. 20580.

SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal 
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46(f), and Sec.  2.34 of 
the Commission Rules of Practice, 16 CFR 2.34, notice is hereby given 
that the above-captioned consent agreement containing a consent order 
to cease and desist, having been filed with and accepted, subject to 
final approval, by the Commission, has been placed on the public record 
for a period of thirty (30) days. The following Analysis to Aid Public 
Comment describes the terms of the consent agreement, and the 
allegations in the complaint. An electronic copy of the full text of 
the consent agreement package can be obtained from the FTC Home Page 
(for January 23, 2008), on the World Wide Web, at http://www.ftc.gov/os/2008/01/index.htm. A paper copy can be obtained from the FTC Public 
Reference Room, Room 130-H, 600 Pennsylvania Avenue, N.W., Washington, 
D.C. 20580, either in person or by calling (202) 326-2222.
    Public comments are invited, and may be filed with the Commission 
in either paper or electronic form. All comments should be filed as 
prescribed in the ADDRESSES section above, and must be received on or 
before the date specified in the DATES section.

Analysis of Agreement Containing Consent Order to Aid Public Comment

    The Federal Trade Commission (``Commission'') has accepted, subject 
to final approval, an Agreement Containing Consent Order 
(``Agreement'') with Negotiated Data Solutions LLC (``N-Data''), a 
limited liability company whose sole activity is to collect royalties 
in connection with a number of patents. The Agreement settles 
allegations that N-Data has violated Section 5 of the Federal Trade 
Commission Act, 15 U.S.C. Sec.  45, by engaging in unfair methods of 
competition and unfair acts or practices relating to the Ethernet 
standard for local area networks. Pursuant to the Agreement, N-Data has 
agreed to be bound by a proposed consent order (``Proposed Consent 
Order'').
    The Proposed Consent Order has been placed on the public record for 
thirty (30) days for comments by interested persons. Comments received 
during this period will become part of the public record. After thirty 
(30) days, the Commission will again review the Agreement and the 
comments received and will decide whether it should withdraw from the 
Agreement or make final the Agreement's Proposed Consent Order.
    The purpose of this analysis is to facilitate comment on the 
Proposed Consent Order. This analysis does not constitute an official 
interpretation of the Proposed Consent Order, and does not modify its 
terms in any way. The Agreement has been entered into for settlement 
purposes only, and does not constitute an admission by N-Data that the 
law has been violated as alleged or that the facts alleged, other than 
jurisdictional facts, are true.

Background

    The Institute of Electrical and Electronics Engineers (``IEEE'') is 
a standard-setting organization active in a number of different 
industries. IEEE standards often enhance the interoperability of 
communications products. One important example, which is at issue here, 
is the 802 series of networking standards. Many of the standards in the 
802 series allow users to reliably access and share information over 
communications systems by interconnecting many compatible products 
manufactured by different producers.
    The IEEE 802.3 standard, first published in 1983, and commonly 
referred to as ``Ethernet,'' applies to local area networks (``LANs'') 
built on copper, and more recently fiber optic, cables. That standard 
initially accommodated a maximum data transmission rate of 10 megabits 
per second (10 Mbps) between networked devices. By 1994, the 802.3 
Working Group was developing a new 802.3 standard for ``Fast 
Ethernet,'' which would transmit data across a copper wire at 100 Mbps. 
The Working Group determined that it would be desirable for Fast 
Ethernet equipment to be compatible, to the extent possible, with 
existing LAN equipment and with future generations of equipment. A 
technology, variously known as ``autodetection'' and 
``autonegotiation,'' was developed that would permit such 
compatibility.
    Employees of National Semiconductor Corporation (``National'') were 
members and active participants in the 802.3 Working Group. In 1994, 
National proposed that the 802.3 Working Group adopt its 
autonegotiation technology, referred to as ``NWay,'' into the Fast 
Ethernet standard. At the time, National disclosed to the Working Group 
that it had already filed for patent protection for the technology. 
Several other participants also had developed competing technologies 
and the Working Group considered several alternatives, each having 
advantages and disadvantages compared to NWay. The 802.3 Working Group 
also considered adopting the Fast Ethernet standard without any 
autonegotiation feature.
    At IEEE meetings to determine which autonegotiation technology to 
include in 802.3, one or more representatives of National publicly 
announced that if NWay technology were chosen, National would license 
NWay to any requesting party for a one-time fee of $1,000. In a 
subsequent letter dated June 7, 1994, and addressed to the Chair of the 
802.3 Working Group of IEEE, National wrote:
    In the event that the IEEE adopts an autodetection standard based 
upon National's NWay technology, National will offer to license its 
NWay technology to any requesting party for the purpose of making and 
selling products which implement the IEEE standard. Such a license will 
be made available on a nondiscriminatory basis and will be paid-up and 
royalty-free after payment of a one-time fee of one thousand dollars 
($1,000).
    Based on National's licensing assurance, and following its normal 
balloting and voting procedures, IEEE incorporated NWay technology into 
the Fast Ethernet standard, which IEEE published in final form in July 
1995. To maintain compatibility with the installed base of Ethernet and 
Fast Ethernet equipment, subsequent revisions of the 802.3 standard 
also have

[[Page 5848]]

incorporated NWay autonegotiation technology. The ``Fast Ethernet'' 
standard became the dominant standard for LANs, and users are now 
locked in to using NWay technology due to network effects and high 
switching costs. Therefore, today, autonegotiation technologies other 
than NWay are not attractive alternatives to NWay for manufacturers who 
want to include inter-generational compatibility in their Ethernet 
products.
    NWay contributed to the success of Fast Ethernet technology in the 
marketplace. An installed base of millions of Ethernet ports operating 
at 10 Mbps already existed when IEEE published the Fast Ethernet 
standard. The autonegotiation technology in the Fast Ethernet standard 
allowed owners of existing Ethernet-based LANs to purchase and install 
multi-speed, Fast Ethernet-capable equipment on a piecemeal basis 
without having to upgrade the entire LAN at once or buy extra equipment 
to ensure compatibility.
    National benefitted financially from its licensing assurance. The 
assurance accelerated sales of National products that conformed to the 
Fast Ethernet standard by first, allaying concerns about the future 
costs of autonegotiation, and so speeding completion of the standard, 
and second, making Fast Ethernet-compatible products backward 
compatible with Ethernet equipment already installed on existing LANs, 
increasing the demand for Fast Ethernet products by those with existing 
systems.
    In 1997, the United States Patent and Trademark Office issued U.S. 
Patent Nos. 5,617,418 and 5,687,174 (the '418 and '174 Patents) to 
National. Both patents arose from the patent application that National 
disclosed to the IEEE in 1994. National later received equivalent 
patents in other countries.
    In 1998, National assigned a number of patents, including the '418 
and the '174 Patents, to Vertical Networks (``Vertical''), a 
telecommunications start-up company founded by former National 
employees. Before the assignment, National gave Vertical a copy of the 
June 7, 1994 letter to the 802.3 Working Group. Vertical's outside 
patent counsel, Mr. Alan Loudermilk, acknowledged in writing that 
National had informed him ``that several of the patents may be 
`encumbered''' by actions National had taken with respect to the IEEE 
standards. The final agreement between Vertical and National stated 
that the assignment was ``subject to any existing licenses that 
[National] may have granted.'' It further provided, ``Existing licenses 
shall include . . . [p]atents that may be encumbered under standards 
such as an IEEE standard ... ''
    In 2001, Vertical turned to its intellectual property portfolio in 
an effort to generate new revenues by licensing its technology to third 
parties. One aspect of this strategy was Vertical's effort to repudiate 
the $1,000 licensing term contained in National's 1994 letter of 
assurance to the IEEE. On March 27, 2002, Vertical sent a letter to the 
IEEE that purported to ``supersede'' any previous licensing assurances 
provided by National. Vertical identified nine U.S. patents assigned to 
it by National, including the '174 and '418 patents, and promised to 
make available to any party a non-exclusive license ``on a non-
discriminatory basis and on reasonable terms and conditions including 
its then current royalty rates.''
    In the Spring of 2002, Vertical developed a list of ``target 
companies'' that practiced the IEEE 802.3 standard and which it 
believed infringed on the `174 and `418 patents. Vertical sought to 
enforce the new licensing terms on these companies. These companies, 
which included many large computer hardware manufacturers, represented 
a substantial majority of all producers of 802.3 ports. Vertical's 
patent counsel, Mr. Loudermilk, sent letters to most of these companies 
between 2002 and 2004 offering a license for patents covering aspects 
of ``the auto-negotiation functionality'' in networking products, 
including products compliant with IEEE 802.3. Vertical also filed suit 
against a number of companies alleging that ``switches, hubs, routers, 
print servers, network adapters and networking kits'' having 
autonegotiating compatibility, infringed its '174 and '418 patents. 
Vertical entered into several licensing agreements producing licensing 
fees far in excess of $1,000 from each licensed company.
    In late 2003, Vertical assigned some of its patent portfolio, 
including the '174 and '418 patents, to N-Data, a company owned and 
operated by Mr. Loudermilk.\2\ N-Data was aware of National's June 7, 
1994 letter of assurance to the IEEE when Vertical assigned those 
patents to N-Data. Yet it rejected requests from companies to license 
NWay technology for a one-time fee of $1,000. Instead, N-Data 
threatened to initiate, and in some cases prosecuted, legal actions 
against companies refusing to pay its royalty demands, which are far in 
excess of that amount.
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    \2\ Vertical subsequently sold its remaining business assets and 
ceased operations.
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The Proposed Complaint

    Vertical and N-Data sought to exploit the fact that NWay had been 
incorporated into the 802.3 standard, and had been adopted by the 
industry for a number of years, by reneging on a known commitment made 
by their predecessor in interest. Even if their actions do not 
constitute a violation of the Sherman Act, they threatened to raise 
prices for an entire industry and to subvert the IEEE decisional 
process in a manner that could cast doubt on the viability of 
developing standards at the IEEE and elsewhere. The threatened or 
actual effects of N-Data's conduct have been to increase the cost of 
practicing the IEEE standards, and potentially to reduce output of 
products incorporating the standards.\3\ N-Data's conduct also 
threatens to reduce the incentive for firms to participate in IEEE and 
in other standard-setting activities, and to rely on standards 
established by standard-setting organizations.
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    \3\ The conduct by Vertical and N-Data has led to, or threatened 
to lead to, increased prices in the markets for autonegotiation 
technology (1) used in 802.3 compliant products and (2) used in 
products that implement an IEEE standard enabling autonegotiation 
with 802.3 compliant products.
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    The Proposed Complaint alleges that this conduct violates Section 5 
of the FTC Act in two ways: first, N-Data engaged in an unfair method 
of competition; and second, N-Data engaged in an unfair act or 
practice.

1. Unfair Method of Competition

    N-Data's conduct constitutes an unfair method of competition. The 
Supreme Court in FTC v. Sperry & Hutchinson Co. endorsed an expansive 
reading of the ``unfair method of competition'' prong of Section 5, 
stating that the Commission is empowered to ``define and proscribe an 
unfair competitive practice, even though the practice does not infringe 
either the letter or spirit of the antitrust laws'' and to ``proscribe 
practices as unfair ... in their effect on competition.''\4\ That 
description of the

[[Page 5849]]

scope of Section 5 accords with the legislative history of Section 
5.\5\
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    \4\FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 239 (1972); see 
also FTC v. Ind. Fed'n of Dentists, 476 U.S. 447, 454 (1986). See 
generally Concurring Opinion of Commissioner Jon Leibowitz, In re 
Rambus, Inc., Docket No. 9302, available at http://www.ftc.gov/os/adjpro/d9302/060802rambusconcurringopinionofcommissionerleibowitz.pdf; Statement of Commissioner J. Thomas Rosch, 
``Perspectives on Three Recent Votes: the Closing of the Adelphia 
Communications Investigation, the Issuance of the Valassis Complaint 
& the Weyerhaeuser Amicus Brief,'' before the National Economic 
Research Associates 2006 Antitrust & Trade Regulation Seminar, Santa 
Fe, New Mexico (July 6, 2006) at 5-12, available at http://www.ftc.gov/speeches/rosch/Rosch-NERA-Speech-July6-2006.pdf.
    \5\See, e.g., Cong. Rec. 12,153 (1914) (statement of Sen. 
Robinson) (``unjust, inequitable or dishonest competition'' 
proscribed), 51 Cong. Rec. 12,154 (1914) (statement of Sen. 
Newlands) (conduct that is ``contrary to good morals'' proscribed).
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    Notwithstanding that broad description, the unfair method of 
competition prong of Section 5 is subject to limiting principles. The 
first relates to the nature of the conduct. In OAG, the Second Circuit 
held that such a violation could not be found where the respondent 
``does not act coercively.''\6\ Similarly, in Ethyl the Second Circuit 
held that ``at least some indicia of oppressiveness must exist ...''\7\ 
This requirement is met here, given N-Data's efforts to exploit the 
power it enjoys over those practicing the Fast Ethernet standard and 
lacking any practical alternatives. This form of patent hold-up is 
inherently ``coercive'' and ``oppressive'' with respect to firms that 
are, as a practical matter, locked into a standard.
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    \6\Official Airline Guides v. FTC, 630 F.2d 920, 927 (2d Cir. 
1980) (``OAG'').
    \7\E.I. Du Pont v. de Nemours & Co. v. FTC, 729 F.2d 128, 139-40 
(2d Cir. 1984) (``Ethyl'').
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    The second limiting principle relates to the effects of the 
conduct. Although the Supreme Court has made it clear that the 
respondent's conduct need not violate the letter (or even the spirit) 
of the antitrust laws to fall under Section 5, that does not mean that 
conduct can be considered an unfair method of competition if it has no 
adverse effect at all on competition. That requirement, however, is 
also satisfied here, given the conduct's adverse impact on prices for 
autonegotiation technology and the threat that such conduct poses to 
standard-setting at IEEE and elsewhere.
    Respondent's conduct here is particularly appropriate for Section 5 
review. IEEE's determination to include National's technology in its 
standard rested on National's commitment to limit royalties to $1,000. 
That commitment had substantial competitive significance because it 
extended not to a single firm, but rather to an industry-wide standard-
setting organization. Indeed, in the standard-setting context--with 
numerous, injured third parties who lack privity with patentees and 
with the mixed incentives generated when members may be positioned to 
pass on royalties that raise costs market-wide--contract remedies may 
prove ineffective, and Section 5 intervention may serve an unusually 
important role.
    N-Data's conduct, if allowed, would reduce the value of standard-
setting by raising the possibility of opportunistic lawsuits or threats 
arising from the incorporation of patented technologies into the 
standard after a commitment by the patent holder. As a result, firms 
may be less likely to rely on standards, even standards that already 
exist. In the creation of new standards, standard-setting organizations 
may seek to avoid intellectual property entirely, potentially reducing 
the technical merit of those standards as well as their ultimate value 
to consumers.
    A mere departure from a previous licensing commitment is unlikely 
to constitute an unfair method of competition under Section 5. The 
commitment here was in the context of standard-setting. The Supreme 
Court repeatedly has recognized the procompetitive potential of 
standard-setting activities. However, because a standard may displace 
the normal give and take of competition, the Court has not hesitated to 
impose antitrust liability on conduct that threatens to undermine the 
standard-setting process or to render it anticompetitive.\8\ The 
conduct of N-Data (and Vertical) at issue here clearly has that 
potential.\9\
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    \8\See Standard Sanitary Mfg. Co. v. United States, 226 U.S. 20, 
41 (1912); Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 
U.S. 492, 500 (1989); Am. Soc'y of Mech. Engineers, Inc. v. 
Hydrolevel Corp., 456 U.S. 556, 571 (1982).
    \9\ It is worth noting that, because the proposed complaint 
alleges stand-alone violations of Section 5 rather than violations 
of Section 5 that are premised on violations of the Sherman Act, 
this action is not likely to lead to well-founded treble damage 
antitrust claims in federal court. See Herbert Hovenkamp, Federal 
Antitrust Policy at 588 (2d ed. 1999).
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2. Unfair Act or Practice

    N-Data's efforts to unilaterally change the terms of the licensing 
commitment also constitute unfair acts or practices under Section 5 of 
the FTC Act. The FTC Act states that ``unfair or deceptive acts or 
practices in or affecting commerce[] are . . . unlawful.'' An 
unfairness claim under this part of Section 5 must meet the following 
statutory criteria:
     The Commission shall have no authority . . . to declare unlawful 
an act or practice on the grounds that such act or practice is unfair 
unless the act or practice causes or is likely to cause substantial 
injury to consumers which is not reasonably avoidable by consumers 
themselves and not outweighed by countervailing benefits to consumers 
or to competition.\10\
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    \10\ 15 U.S.C. Sec.  45(n) (1992).
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    The Commission may consider established public policies as evidence 
to be considered with all other evidence, though not as a primary basis 
for a determination of unfairness.\11\ As the Eleventh Circuit 
emphasized in Orkin Exterminating Co. v. FTC,\12\ the Commission has 
applied limiting principles requiring a showing that (1) the conduct 
caused ``substantial consumer injury,'' (2) that injury is ``not . . . 
outweighed by any countervailing benefits to consumers or competition 
that the practice produces,'' and (3) it is an injury that ``consumers 
themselves could not reasonably have avoided.''\13\
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    \11\Id.
    \12\Orkin Exterminating Co. v. FTC, 849 F.2d 1354, 1364 (11th 
Cir. 1988).
    \13\See Letter from Federal Trade Commission to Senators Ford 
and Danforth (Dec. 17, 1980), reprinted in H.R. Rep. No. 156, Pt. 1, 
98th Cong., 1st Sess. 33-40 (1983) available at http://www.ftc.gov/bcp/policystmt/ad-unfair.htm, appended to the Commission's decision 
in International Harvester, 104 F.T.C. at 949, 1061 (1984), and 
subsequently codified by Congress at 15 U.S.C. Sec.  45(n).
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    This Section 5 claim against the efforts of Vertical and N-Data to 
unilaterally increase the price for the relevant technology by 
knowingly reneging on National's commitment meets these statutory 
criteria, and thus constitutes a violation of Section 5's prohibition 
of unfair acts and practices. NWay was chosen for the standard on the 
basis of the assurances made by National to the IEEE 802.3 Working 
Group. Further, the industry relied, at least indirectly, on National's 
assurances regarding pricing, and made substantial and potentially 
irreversible investments premised on those representations. After the 
standard became successful, and it became difficult, if not impossible, 
for the industry to switch away from the standard, Vertical and then N-
Data took advantage of the investments made by these firms by reneging 
on National's commitment. Because it is now no longer feasible for the 
industry to remove the technologies, the value that N-Data was able to 
extract from market participants was due to the opportunistic nature of 
its conduct rather than the value of the patents.\14\
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    \14\ The IEEE designed its rules to avoid just such a result. 
IEEE's stated purpose for requesting letters of assurance was to 
avoid giving ``undue preferred status to a company'' and to ensure 
that the adoption of a technology would not be ``prohibitively 
costly or noncompetitive to a substantial part of the industry.'' 
1994 IEEE Standards Operations Manual Sec. 6.3.
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    Accordingly, an action against this conduct meets the criteria set 
forth in the statute and in Orkin. First, N-Data's reneging on its 
pricing commitments here involved ``substantial consumer injury.'' The 
increase in royalties demanded by Vertical Networks and later N-Data 
could result in millions of dollars in excess payments from those

[[Page 5850]]

practicing the standard, not to mention the legal fees those firms 
might spend defending lawsuits.\15\ In addition, often in market-wide 
standard-setting contexts, the licensees have an incentive to pass 
along higher costs to the ultimate consumers who purchase the 
products.\16\ Thus, these end consumers who purchase products using N-
Data's technology may face increased prices due to the higher 
royalties. Further, those demands also have no apparent 
``countervailing benefit''-- to those upon whom demands have been made, 
ultimate consumers, or to competition--so the second requirement is 
also met. With respect to the third requirement, both the Commission 
and the Eleventh Circuit in Orkin stated that consumers ``may act to 
avoid injury before it occurs if they have reason to anticipate the 
impending harm and the means to avoid it, or they may seek to mitigate 
the damage afterward if they are aware of potential avenues to that 
end.''\17\ Here, those who created the standard had no way to 
anticipate the repudiation of the price commitment before it occurred 
and, apart from expensive litigation, those locked into the standard 
had no way to avoid the threatened injury posed by the demands that 
they faced. Thus, those practicing the standard were locked in to even 
a greater extent than the consumers in Orkin. Put simply, this is a 
form of what has been described as ``patent hold-up.''
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    \15\ The Commission has a ``longstanding position that the 
statutory prohibition against `unfair or deceptive acts or 
practices' includes practices that victimize businesspersons as well 
as those who purchase products for their own personal or household 
use,'' given that businesses ``clearly do consume goods and services 
that may be marketed by means of deception and unfairness.'' Brief 
of Federal Trade Commission as Amicus Curiae at 3-4, 8-9, Vermont v. 
International Collection Service, Inc., 594 A.2d 426 (Vt. 1991) 
(citing cases); see also, e.g., 16 C.F.R. Sec.  436.1 (FTC rule 
protecting franchisees); United States Retail Credit Ass'n v. FTC, 
300 F.2d 212 (4th Cir. 1962) (deception involving business clients); 
United States Ass'n of Credit Bureaus, Inc. v. FTC, 299 F.2d 220 
(4th Cir. 1962) (same).
    \16\ Susan A. Creighton, Cheap Exclusion, 72 Antitrust L.J. 975, 
994 (2005).
    \17\Orkin, 849 F.2d at 1365.
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    The facts alleged in the complaint here are similar to those found 
in the Commission's decision in Orkin, which was affirmed by the 
Eleventh Circuit.\18\ In that case, the respondent signed contracts 
with consumers to supply lifetime extermination services at a fixed 
annual renewal fee. Years later, the respondent unilaterally increased 
these fees. Consumers needing extermination services had no reason to 
anticipate Orkin's unilateral price increase and there was no evidence 
that they could contract with Orkin's competitors on terms similar to 
Orkin's initial terms. The Commission held, and the Eleventh Circuit 
agreed, that Orkin's unilateral price increase was an unfair act or 
practice under Section 5. Similarly, National made non-expiring royalty 
commitments that Vertical and N-Data later repudiated with unilateral 
increases, which the industry could not have reasonably anticipated 
before the market wide adoption of the standard and which consumers had 
no chance of avoiding due to network effects and lock-in.
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    \18\In re Orkin Exterminating Co., 108 F.T.C. 263 (1986), aff'd, 
849 F.2d 1354 (11th Cir. 1988).
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    Clearly, merely breaching a prior commitment is not enough to 
constitute an unfair act or practice under Section 5. The standard-
setting context in which National made its commitment is critical to 
the legal analysis. As described above, the lock-in effect resulting 
from adoption of the NWay patent in the standard and its widespread use 
are important factors in this case. In addition, the established public 
policy of supporting efficient standard-setting activities is an 
important consideration in this case.\19\ Similarly, it must be 
stressed that not all breaches of commitments made by owners of 
intellectual property during a standard-setting process will constitute 
an unfair act or practice under Section 5. For example, if the 
commitment were immaterial to the adoption of the standard or if those 
practicing the standard could exercise countermeasures to avoid injury 
from the breach, the statutory requirements most likely would not be 
met. Finally, it needs to be emphasized that not all departures from 
those commitments will be treated as a breach. The Orkin court 
suggested that there might be a distinction between an open-ended 
commitment and a contract having a fixed duration.\20\ That distinction 
does not apply here because the context of the commitment made it plain 
that it was for the duration of National's patents. However, most such 
commitments, including the one here, are simply to offer the terms 
specified. Indeed, those principles are reflected in the remedy set 
forth in the consent decree.
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    \19\See Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 
U.S. 492, 500-01 (1998) (regarding the potential procompetitive 
advantages of private associations promulgating safety standards).
    \20\Orkin, 849 F.2d at 1361.
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The Proposed Consent Order

    The Proposed Consent Order prohibits N-Data from enforcing the 
Relevant Patents, defined in the order, unless it has first offered to 
license them on terms specified by the order. The terms of that license 
follow from those promised by National Semiconductor in its letter of 
June 7, 1994, to the IEEE. Specifically, N-Data must offer a paid-up, 
royalty-free license to the Relevant Patents in the Licensed Field of 
Use in exchange for a one-time fee of $1,000. The form of this license 
is attached as Appendix C to the order. The Licensed Field of Use is 
defined in the license as the ``use of NWay Technology to implement an 
IEEE Standard,'' and this includes ``optimization and enhancement 
features'' that are consistent with such use. NWay Technology is 
defined in the license to have the same meaning as it did in the June 
7, 1994 letter, and the license gives examples of documents describing 
the use of NWay Technology.
    The Commission recognizes that some firms may inadvertently allow 
the $1,000 offer from N-Data to languish. Therefore, if an offeree has 
failed to accept such an offer within 120 days, the Proposed Consent 
Order allows N-Data to sue to enforce the Relevant Patents. At the time 
N-Data files suit, however, it must make a second offer. This second 
offer provides a prospective licensee with an opportunity to accept the 
patent license specified by the order in return for a payment of 
thirty-five thousand dollars ($35,000). The requirement that the second 
offer be delivered in the context of litigation gives N-Data an 
incentive to pursue patent enforcement only against companies over 
which it has a reasonable likelihood of prevailing in court. It will 
also ensure that the second offer will receive the full attention of 
knowledgeable counsel for the offeree. A $35,000 license fee will 
offset some of N-Data's costs of litigation, and it will discourage 
recipients of an initial offer from simply waiting to be sued, and then 
accepting the first offer. The offeree's time to accept the second 
offer expires with the time to file a responsive pleading to the filing 
that accompanies the second offer. After that, the amount that N-Data 
can collect from an accused infringer is not limited by the order.
    The Proposed Consent Order requires N-Data to distribute copies of 
the complaint and the Proposed Consent Order to specified persons. It 
also prohibits N-Data from transferring any of the Relevant Patents, 
except to a single person who has agreed to be bound by the Proposed 
Consent Order and by the patent licenses formed thereunder. The 
Proposed Consent Order also contains standard reporting, notification 
and access provisions designed to allow the Commission to monitor 
compliance. It terminates

[[Page 5851]]

twenty (20) years after the date it becomes final.

STATEMENT OF THE FEDERAL TRADE COMMISSION

    The Federal Trade Commission (``Commission'') has voted to issue a 
Complaint against Negotiated Data Solutions LLC (``N-Data'') and to 
accept the proposed consent agreement settling it.\1\ The Complaint in 
this matter alleges that N-Data reneged on a prior licensing commitment 
to a standard-setting body and thereby was able to increase the price 
of an Ethernet technology used by almost every American consumer who 
owns a computer. Based on the facts developed by staff during the 
investigation, we find reason to believe that this conduct violated 
Section 5 of the FTC Act.\2\
---------------------------------------------------------------------------

    \1\ Commissioners Harbour, Leibowitz, and Rosch support the 
issuance of the Complaint and proposed consent agreement and join in 
this statement.
    \2\ Section 5 of the FTC Act prohibits ``unfair methods of 
competition in or affecting commerce, and unfair or deceptive acts 
or practices in or affecting commerce.'' 15 USC Sec.  45(a)(1).
---------------------------------------------------------------------------

    The impact of Respondent's alleged actions, if not stopped, could 
be enormously harmful to standard-setting.\3\ Standard-setting 
organization participants have long worried about the impact of firms 
failing to disclose their intellectual property until after industry 
lock-in. Many standard-setting organizations have begun to develop 
policies to deal with that problem. But if N-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. The possibility exists that those companies would 
exit the business, and that their patent portfolios would make their 
way to others who are less interested in honoring commitments than in 
exploiting industry lock-in.\4\ Congress created the Commission 
precisely to challenge just this sort of conduct.
---------------------------------------------------------------------------

    \3\ One dissent recites a different set of facts than those 
alleged in the Complaint. We do not agree with that version of the 
facts. Rather, we believe that staff's investigation, as described 
in the Analysis to Aid Public Comment, accurately depicts the facts 
in this case.
    \4\ See generally Fed. Trade Comm'n , To Promote Innovation: The 
Proper Balance of Competition and Patent Law and Policy ch. 2 at 31, 
n. 220; ch. 3 at 38-41, available at http://www.ftc.gov/os/2003/10/innovationrpt.pdf (2003) (conduct by ``non-producing entities''--
sometimes referred to as `patent trolls'--may harm consumers when 
such firms force manufacturers to agree to licenses after the 
manufacturers have sunk substantial investments into technologies).
---------------------------------------------------------------------------

    To prohibit such unacceptable behavior, the Commission today 
accepts a proposed consent agreement premised on a Complaint that 
identifies two separate violations. First, we find that N-Data's 
alleged conduct is an unfair method of competition. Second, we find 
that this conduct is also an unfair act or practice.
    There is little doubt that N-Data's conduct constitutes an unfair 
method of competition.\5\ The legislative history from the debate 
regarding the creation of the Commission is replete with references to 
the types of conduct that Congress intended the Commission to 
challenge. See, e.g., 51 Cong. Rec. 12,153 (1914) (statement of Sen. 
Robinson) (``unjust, inequitable or dishonest competition''), 51 Cong. 
Rec. 12,154 (1914) (statement of Sen. Newlands) (conduct that is 
``contrary to good morals''). The Supreme Court apparently agrees as it 
has found that the standard for ``unfairness'' under the FTC Act is 
``by necessity, an elusive one, encompassing 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.''  F.T.C. v. Ind. Fed'n of Dentists, 476 U.S. 477, 454 
(1986); see also F.T.C. v. Sperry & Hutchinson Co., 405 U.S. 233, 242 
(1972) (FTC has authority to constrain, among other things ``deception, 
bad faith, fraud or oppression'').
---------------------------------------------------------------------------

    \5\ See, e.g., E.I. du Pont de Nemours & Co. v. FTC, 729 F.2d 
128 (2d Cir. 1984) (``Ethyl''); Official Airline Guides v. FTC, 630 
F.2d 920 (2d Cir. 1980). The conduct falls squarely within the 
parameters of cases like Ethyl. One dissent quotes a passage from 
the Ethyl decision; even that excerpt makes clear that a Section 5 
violation can be found when there are ``some indicia of 
oppressiveness'' such as ``coercive...conduct.'' For the reasons 
stated in the Analysis to Aid Public Comment, we find reason to 
believe that 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. We 
believe the Analysis to Aid Public comment adequately describes the 
limiting principles applicable here. See generally Statement of 
Commissioner J. Thomas Rosch, Perspectives on Three Recent Votes: 
the Closing of the Adelphia Communications Investigation, the 
Issuance of the Valassis Complaint & the Weyerhaeuser Amicus Brief, 
before the National Economic Research Associates 2006 Antitrust & 
Trade Regulation Seminar, Santa Fe, New Mexico (July 6, 2006) at 5-
12, available at http://www.ftc.gov/speeches/rosch/Rosch-NERA-Speech-July6-2006.pdf; Concurring Opinion of Commissioner Jon 
Leibowitz, In re Rambus, Inc., Docket No. 9302, available at http://www.ftc.gov/os/adjpro/d9302/060802rambusconcurringopinionofcommissionerleibowitz.pdf.
    One dissent cites the Areeda and Hovenkamp antitrust treatise as 
well as several other sources to mistakenly suggest that there is a 
``scholarly consensus'' that an unfair method of competition cannot 
be found under Section 5 unless there is liability under the 
antitrust laws. Most of the sources cited by the dissent, however, 
actually support the Analysis to Aid Public Comment, which notes 
that, although Section 5 extends beyond the antitrust laws, there 
are limitations on its reach. Indeed, Professor Hovenkamp has 
explicitly acknowledged that there is a lack of consensus on the 
scope and application of Section 5. See Herbert Hovenkamp, Federal 
Antitrust Policy at 596-97 (3d ed. 2005). Professor Hovenkamp states 
that ``[t]here are two views about the wisdom of the FTC's use of 
Section 5'' and goes on to discuss ``[A]n alternative view, 
perfectly consistent with the proposition that the FTC's antitrust 
concern should be limited to identifying practices that are 
economically anticompetitive.'' Under that alternative view, it is 
appropriate to apply ``the FTC Act to practices that do not violate 
the other antitrust laws . . . when (1) the practice seems 
anticompetitive but is not technically covered by the antitrust 
laws; and (2) the social cost of an error seems to be relatively 
small.'' The social cost of an error here is small given the nature 
of the remedy and the low likelihood that a Commission consent order 
will be followed by a valid antitrust-based class action suit. See 
id. (``Findings of violations of the FTC Act that are not also 
antitrust violations will not support subsequent private actions for 
treble damages''). We nevertheless recognize Commissioner Kovacic's 
concern that FTC ``unfair methods'' cases may support private 
actions based on state law, and join him in encouraging comment on 
that issue.
---------------------------------------------------------------------------

    We also have no doubt that the type of behavior engaged in by N-
Data harms consumers. The process of establishing a standard displaces 
competition; therefore, bad faith or deceptive behavior that undermines 
the process may also undermine competition in an entire industry, raise 
prices to consumers, and reduce choices.\6\ We have previously noted 
that ``[i]ndustry standards are widely acknowledged to be one of the 
engines driving the modern economy.''\7\ Conduct like N-Data's--which 
undermines standard-setting--threatens to stall that engine to the 
detriment of all consumers.
---------------------------------------------------------------------------

    \6\ See Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 
U.S. 492, 500 (1989); Am. Soc'y of Mech. Engineers, Inc. v. 
Hydrolevel Corp., 456 U.S. 556, 571 (1982); Standard Sanitary Mfg. 
Co. v. United States, 226 U.S. 20, 41 (1912). See generally Broadcom 
Corp. v. Qualcomm Inc., 501 F.3d 297, 310-314 (3d Cir. 2007).
    \7\ U.S. Dep't of Justice & Fed. Trade Comm'n, Antitrust 
Enforcement And Intellectual Property Rights: Promoting Innovation 
And Competition 33, available at http://www.ftc.gov/reports/innovation/P040101PromotingInnovationandCompetitionrpt0704.pdf 
(2007).
---------------------------------------------------------------------------

    N-Data's conduct is also an unfair act or practice under Section 
5(n) of the FTC Act and Orkin Exterminating Co., 108 F.T.C. 263 (1986), 
aff'd, 849 F.2d 1354 (11th Cir. 1988). This Commission--unanimously--
has often found an unfair act or practice proscribed by Section 5 in 
conduct that victimizes businesses (as well as individuals) who are 
consumers. The dissent would distinguish those cases on the ground that 
the businesses here are all ``large, sophisticated computer 
manufacturers'' who are able to protect themselves. There is no basis 
for that distinction in Section 5. In any event, moreover, there is no 
basis in the record of this investigation for describing all of the 
``locked in'' licensees that way.

[[Page 5852]]

Similarly, as discussed in detail in the Analysis to Aid Public 
Comment, no meaningful distinction can be drawn between the 
circumstances in Orkin, where the respondent sought to exploit 
consumers who were ``locked into'' long term contracts, and the unique 
circumstances of this case, where licensees are ``locked into'' the 
standard containing technology controlled by this Respondent.
    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 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.
    By direction of the Commission, Chairman Majoras and Commissioner 
Kovacic dissenting.

Donald S. Clark
Secretary

DISSENTING STATEMENT OF CHAIRMAN MAJORAS

    I respectfully dissent from the decision to lodge a Complaint in 
this matter and to accept the settlement described in the majority's 
Analysis of Proposed Consent Order to Aid Public Comment 
(``Analysis''). The facts do not support a determination of antitrust 
liability. The preconditions for use of stand-alone Section 5 authority 
to find an ``unfair method of competition'' are not present. And the 
novel use of our consumer protection authority to protect large 
corporate members of a standard-setting organization (``SSO'') is 
insupportable.
    This case presents issues that appear on first inspection to 
resemble those in our line of standard-setting ``hold up'' challenges, 
including Unocal,\1\Dell,\2\ and Rambus.\3\ As we and the Justice 
Department have explained jointly, ``multiple technologies may compete 
to be incorporated into the standard under consideration''\4\ by an 
SSO. Once a technology has been selected and the standard that 
incorporates the technology has been specified, however, the standard's 
adopters often will face significant relative costs in switching to an 
alternative standard. ``[T]he chosen technology may lack effective 
substitutes precisely because the SSO chose it as the standard. Thus, . 
. . the owner of a patented technology necessary to implement the 
standard may have the power to extract higher royalties or other 
licensing terms that reflect the absence of competitive alternatives. 
Consumers of the products using the standard would be harmed if those 
higher royalties were passed on in the form of higher prices.''\5\ In 
an effort to avoid the hold-up problem, some SSOs take measures to 
protect their members, such as imposing patent disclosure rules or 
securing agreement on licensing terms.\6\
---------------------------------------------------------------------------

    \1\ In re Union Oil Company of California, 2004 FTC LEXIS 115 
(FTC 2004) (``Unocal''), available at http://www.ftc.gov/os/adjpro/d9305/040706commissionopinion.pdf.
    \2\ In re Dell, 121 F.T.C. 616 (1996).
    \3\ In re Rambus, FTC Dkt. No. 9302 (Liability Opinion, July 31, 
2006), appeal pending, Docket Nos. 07-1086, 07-1124 (D.C. Cir. 
2007).
    \4\ U.S. Department of Justice and Federal Trade Commission, 
Antitrust Enforcement And Intellectual Property Rights: Promoting 
Innovation And Competition (April 2007) at 35-36 [hereinafter ``DOJ/
FTC Intellectual Property Report''], available at http://www.ftc.gov/reports/innovation/P040101PromotingInnovationandCompetitionrpt0704.pdf.
    \5\ Id. at 36. See also Chairman Deborah Platt Majoras, 
Recognizing the Procompetitive Potential of Royalty Discussions in 
Standard Setting, Remarks before the Stanford University Conference 
on Standardization and the Law: Developing the Golden Mean for 
Global Trade (September 2005), available at http://www.ftc.gov/speeches/majoras/050923stanford.pdf.
    \6\ DOJ/FTC Intellectual Property Report, supra note 4, at 36.
---------------------------------------------------------------------------

    This case departs materially from the prior line, however, in that 
there is no allegation that National engaged in improper or 
exclusionary conduct to induce IEEE to specify its NWay technology in 
the 802.3u standard. No one contends that National deceived SSO members 
at the time of its initial licensing offer in 1994. Further, from the 
time National submitted its letter of assurance in 1994 and at least 
until 2002, some patent holders changed or clarified the terms of their 
letters of assurance--even after the relevant standard was approved. 
And although a new IEEE bylaw, passed in January 2002, purported to 
make patent letters irrevocable, it did not address whether it was to 
apply retroactively. When Vertical submitted its 2002 proposal under 
which it would offer its entire patent portfolio that originated with 
National for license on reasonable and nondiscriminatory terms, the 
IEEE's Patent Administrator did not object to the departure from the 
$1,000 commitment, even while requesting and securing specific changes 
to Vertical's proposal. The IEEE then appeared to have accepted the 
revised proposal by posting Vertical's letter on its web site along 
with National's June 7, 1994 letter.
    There is also a substantial question as to whether N-Data enjoyed 
measurable market power, even with the adoption of the IEEE standard. 
Under the terms of the standard, the NWay technology was an optional 
technique. Although National in 1994 had offered to grant a paid-up, 
royalty-free license to the technology for $1,000 to anyone seeking to 
practice the standard, no company had sought to accept the offer until 
after publication of the 2002 revision on the IEEE web site. And 
despite ongoing licensing efforts by National's successors, Vertical 
and N-Data, only one company paid materially more than the originally-
quoted $1,000 for rights to the NWay technology.\7\ Most users 
evidently have preferred to infringe, running the risk of presumably 
minimal patent damages that they might face at the outcome of 
litigation.
---------------------------------------------------------------------------

    \7\ Paragraph 31 of the Complaint alleges that ``several 
companies'' entered into license agreements that have produced fees 
``far in excess'' of $1,000 per company. In fact, three companies 
entered into license agreements (with Vertical) for the patents. N-
Data has never received royalties or fees from those agreements, 
nor, as I understand it, has it collected any royalties for the 
relevant patents on terms inconsistent with those offered in the 
1994 letter. N-Data itself has initiated suit against one company, 
with which it had a dispute involving numerous patents other than 
those at issue in this case.
---------------------------------------------------------------------------

    Thus, the facts do not support antitrust liability here.
    The majority evidently agrees that respondent's conduct does not 
amount to improper acquisition or maintenance of monopoly power so as 
to fall within the ambit of Section 2 of the Sherman Act. Instead, the 
majority seeks to find liability purely under Section 5 of the FTC Act. 
This is not advisable as a matter of policy or prosecutorial 
discretion.
    The majority's first theory is that N-Data engaged in an unfair 
method of competition. Although Section 5 enables the Commission to 
reach conduct that is not actionable under the Sherman or Clayton Acts, 
we have largely limited ourselves to matters in which respondents took 
actions short of a fully consummated Section 1 violation (but with 
clear potential to harm competition), such as invitations to 
collude.\8\ This limitation is partly self-

[[Page 5853]]

imposed, reflecting the Commission's recognition of the scholarly 
consensus that finds the Sherman and Clayton Acts, as currently 
interpreted, to be sufficiently encompassing to address nearly all 
matters that properly warrant competition policy enforcement.\9\ But 
the limitation also reflects the insistence of the appellate courts 
that the Commission's discretion is bounded and must adhere to limiting 
principles. In E.I. du Pont de Nemours & Co. v. FTC, for example, the 
Second Circuit stated: ``[w]hen a business practice is challenged by 
the Commission, even though, as here, it does not violate the antitrust 
or other laws and is not collusive, coercive, predatory or exclusionary 
in character, standards for determining whether it is `unfair' within 
the meaning of Sec.  5 must be formulated to discriminate between 
normally acceptable business behavior and conduct that is unreasonable 
or unacceptable.''\10\ Writing in the context of a challenge to 
parallel conduct that did not arise from an agreement but that 
facilitated oligopolistic coordination, the Second Circuit adopted this 
test:
---------------------------------------------------------------------------

    \8\ See, e.g., In re Valassis Communications, Inc., Docket No. 
C-4160, FTC File No. 051 008 (Complaint), available at http://www.ftc.gov/os/caselist/0510008/0510008c4160ValassisComplaint.pdf. 
In its Analysis, the Commission explained that competition would not 
be adequately protected if antitrust enforcement were directed only 
at consummated cartel agreements. The Commission further explicated 
the several legal (including precedent) and economic justifications 
that support the imposition of liability upon firms that communicate 
an invitation to collude where acceptance cannot be proven. Prior to 
the Valassis case, the Commission entered into consent agreements in 
several cases alleging that an invitation to collude--though 
unaccepted by the competitor--violated Section 5 of the FTC Act. 
MacDermid, Inc., Docket No. C-3911, FTC File No. 991 0167 (Decision 
& Order), available at http://www.ftc.gov/os/2000/02/macdermid.do.htm; Stone Container Corp., 125 F.T.C. 853 (1998); 
Precision Moulding Co., 122 F.T.C. 104 (1996); YKK (USA) Inc., 116 
F.T.C. 628 (1993); A.E. Clevite, Inc., 116 F.T.C. 389 (1993); 
Quality Trailer Products Corp., 115 F.T.C. 944 (1992).
    \9\ See, e.g., 5 Julian O. Von Kalinoski, Peter Sullivan & 
Maureen McGuirl, Antitrust Laws and Trade Regulation, Sec.  77.02 at 
77-3 (2007) (``the prevailing view is that there are limitations on 
Section 5's applicability to conduct which stretches beyond the 
letter of [the Sherman or Clayton Acts].''); 2 Philip Areeda & 
Herbert Hovenkamp, Antitrust Law ] 302(h) (2006) (``Apart from 
possible historical anachronisms in the application of those 
statutes, the Sherman and Clayton Acts are broad enough to cover any 
anti-competitive agreement or monopolistic situation that ought to 
be attacked whether `completely full blown or not.'''); Richard A. 
Posner, The Federal Trade Commission: A Retrospective, 72 Antitrust 
L.J. 761, 766 (2005) (``It used to be thought that `unfair methods 
of competition' swept further than the practices forbidden by the 
Sherman and Clayton Acts, and you find this point repeated 
occasionally even today, but it is no longer tenable. The Sherman 
and Clayton Acts have been interpreted so broadly that they no 
longer contain gaps that a broad interpretation of Section 5 of the 
FTC Act might be needed to fill.''); John F. Graybeal, Unfair Trade 
Practices, Antitrust And Consumer Welfare In North Carolina, 80 N.C. 
L. Rev. 1927, 1949 (2002) (``Undoubtedly, the FTC today will proceed 
with great caution under section 5 to claim as an unfair method of 
competition any conduct that does not violate the Sherman or Clayton 
Acts.''). See also ABA Section of Antitrust Law, Antitrust Law 
Developments (6th ed. 2007) (``FTC decisions have been overturned 
despite proof of anticompetitive effect where the courts have 
concluded that the agency's legal standard did not draw a sound 
distinction between conduct that should be proscribed and conduct 
that should not.'').
    \10\ 729 F.2d 128, 138 (2d Cir. 1984).
---------------------------------------------------------------------------

     In our view, before business conduct in an oligopolistic industry 
may be labelled ``unfair'' within the meaning of Sec.  5 a minimum 
standard demands that, absent a tacit agreement, at least some indicia 
of oppressiveness must exist such as (1) evidence of anticompetitive 
intent or purpose on the part of the producer charged, or (2) the 
absence of an independent legitimate business reason for its conduct. . 
. . In short, in the absence of proof of a violation of the antitrust 
laws or evidence of collusive, coercive, predatory, or exclusionary 
conduct, business practices are not ``unfair'' in violation of Sec.  5 
unless those practices either have an anticompetitive purpose or cannot 
be supported by an independent legitimate reason.\11\
---------------------------------------------------------------------------

    \11\ Id. at 139-140.
---------------------------------------------------------------------------

    In its Analysis, the majority extends the du Pont formulation to 
the monopolization family, asserting that respondent's conduct was 
``coercive'' and ``oppressive'' and had an ``adverse impact on prices 
for autonegotiation technology[.]''\12\ These assertions are impossible 
to prove on the evidence we have. N-Data asserts that its renegotiation 
of its licensing terms was motivated by nothing other than an 
independent, business reason--that is, the aim of collecting royalties 
for a new bundle of intellectual property rights on reasonable and non-
discriminatory terms. Even if N-Data were motivated by a desire to 
strike a better bargain than National made several years earlier, that 
alone should not be considered a competition-related offense. If the 
majority's theory is that the evasion of contractual price constraints 
triggers liability under Section 5 without a concurrent determination 
that the conduct violates the Sherman Act, then we are headed down a 
slippery slope, and I take no comfort from the majority's 
representation to the contrary. Parties often enter into contractual 
commitments involving asset-specific investments, creating the 
potential for opportunism. 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.''
---------------------------------------------------------------------------

    \12\ Analysis at 5.
---------------------------------------------------------------------------

    Pursuing a second theory, the majority invokes consumer protection 
doctrine to find that respondent has engaged in an ``unfair act or 
practice'' in violation of Sections 5(a) and (n) of the FTC Act.\13\ 
Section 5(n) provides a clear limitation of the Commission's authority: 
``[t]he Commission shall have no authority under this section or 
section 57a of this title to declare unlawful an act or practice on the 
grounds that such act or practice is unfair unless the act or practice 
causes or is likely to cause substantial injury to consumers which is 
not reasonably avoidable by consumers themselves and not outweighed by 
countervailing benefits to consumers or to competition.''\14\ The 
evidence simply does not support the requisite findings.
---------------------------------------------------------------------------

    \13\ In Rambus, the Commission drew upon its experience with the 
law regarding deceptive acts or practices, which has been developed 
largely in consumer protection contexts, to inform our analysis of 
deception before an SSO as part of an exclusionary course of 
conduct. Rambus, supra note 3, at 29-30. We did so, however, within 
a framework based on Sherman Act jurisprudence, recognizing, inter 
alia, the need to examine competitive effects.  Id. at 28-31. The 
majority's extension of our authority over unfair acts or practices, 
which Congress has specifically limited in Section 5(n), raises 
altogether different issues.
    \14\ 15 U.S.C. Sec.  45(n) (2000). See also International 
Harvester Co., 104 F.T.C. 949, 1061 (1984).
---------------------------------------------------------------------------

    In particular, finding ``substantial consumer injury'' here 
requires the majority to treat large, sophisticated computer 
manufacturers as ``consumers.'' I do not agree with such a 
characterization, and I have serious policy concerns about using our 
consumer protection authority to intervene in a commercial transaction 
to protect the alleged ``victims'' here. The Analysis accurately states 
that the FTC has used its authority under Section 5 to protect small 
businesses against unfair acts and practices. We have taken care to 
exercise this authority judiciously, however, to protect small 
businesses, non-profits, churches, and ``mom and pop'' operations\15\ 
that lack

[[Page 5854]]

the resources and, in some cases, the experience or understanding to 
defend themselves adequately against fraud. Indeed, certain of these 
small business owners, non-profit volunteers, and clergy had personally 
guaranteed the contracts at issue. There is a clear qualitative 
difference between these entities and the computer manufacturers that 
the majority treats as injured consumers in this matter.\16\
---------------------------------------------------------------------------

    \15\ See, e.g., FTC v. Websource Media, LLC, No. H-06-1980 (S.D. 
Tex. filed June 12, 2006) (unfair practice of ``cramming'' 
unauthorized charges onto the telephone bills of small businesses); 
FTC v. Certified Merchant Services, Ltd., No. 4:02CV44 (E.D. Tex. 
filed February 11, 2002) (unfair practice of unilaterally inserting 
additional pages that describe substantial, undisclosed charges into 
credit card processing contracts with small business merchants); FTC 
v. IFC Credit Corp., No. 07C3155 (N.D. Ill. filed June 6, 2007) 
(unfair practice of accepting and collecting on invalid, 
fraudulently induced equipment contracts with small businesses and 
religious and other nonprofit organizations). The majority cites to 
the Franchise Rule as another example of the Commission using its 
Section 5 consumer protection authority to protect small businesses 
from deceptive practices. While the Franchise Rule, which requires 
certain disclosures prior to the sale of a franchise, sometimes 
protects businesses, it typically protects individual consumers that 
are purchasing franchises rather than sophisticated corporations. In 
adopting amendments to the Franchise Rule earlier this year, the 
Commission exempted from the Rule's coverage several categories of 
sophisticated investors. 16 C.F.R. Sec.  436.8(a).
    \16\ Some may argue that the Commission has already made the 
policy decision to treat businesses as consumers, and that there is 
no rational distinction between the companies we have protected and 
large corporations. I disagree. Although it is important to draw 
lines, there is such a vast difference between sophisticated 
corporations, on the one hand, and storefront shops, on the other, 
that we do not need to draw a bright line to distinguish this matter 
from previous cases the Commission has brought to protect small 
businesses.
---------------------------------------------------------------------------

    As I stated above, I am not convinced that any party was injured. 
And certainly the evidence does not support the finding that the 
alleged injury here was ``not reasonably avoidable'' (assuming, of 
course, that injury can be made out at all). The membership of IEEE 
includes computer networking equipment manufacturers and 
telecommunications companies. IEEE knew that its members sometimes made 
or attempted to make changes in patent commitment letters, and it could 
have acted sooner to protect its members from potentially adverse 
changes to commitment letters. IEEE also could have objected to 
Vertical's revisions, but instead it accepted and published them 
without objection. Moreover, any individual company could have entered 
into a binding agreement with National, but none sought timely to 
accept the 1994 royalty offer.
    In re Orkin Exterminating Co., Inc.,\17\ on which the majority 
relies, is fundamentally different from the instant matter. Orkin 
unilaterally increased its fees for more than 200,000 consumers, all of 
whom had signed written contracts that could readily be understood to 
be binding and that committed to a lifetime fee structure that would 
not increase.\18\ If consumers paid the amount specified in their 
contracts, Orkin's policy was to return the payments. Thus, unlike the 
situation here, Orkin involved both (a) large numbers of individual 
consumers, and (b) widespread injury that the consumers could not 
reasonably avoid.
---------------------------------------------------------------------------

    \17\ 108 F.T.C. 263 (1986), aff'd, FTC v. Orkin, 849 F.2d 1354 
(11th Cir. 1988).
    \18\ Orkin pamphlets echoed this commitment, promising that the 
annual fee would ``never increase.'' 108 F.T.C. at 356.
---------------------------------------------------------------------------

    For all of these reasons, I respectfully dissent.

DISSENTING STATEMENT OF COMMISSIONER KOVACIC

    I oppose the Commission's decision to accept for comment the 
settlement described in the Analysis to Aid Public Comment 
(``Analysis''). Like Chairman Majoras,\1\ I would not find that the 
Respondent engaged in an unfair method of competition or an unfair act 
or practice within the meaning of Section 5 of the Federal Trade 
Commission Act. Below I discuss two of the considerations that have 
influenced my thinking about this matter. These can serve as focal 
points for public comment before the Commission votes on whether to 
make the provisional settlement final.
---------------------------------------------------------------------------

    \1\ Dissenting Statement of Chairman Majoras, In the Matter of 
Negotiated Data Solutions LLC, File No. 0510094.
---------------------------------------------------------------------------

Effect on Private Rights of Action

    The Commission concludes that the respondent did not violate the 
Sherman Act or the Clayton Act. The Commission finds that the 
respondent violated Section 5 of the Federal Trade Commission Act 
because its conduct constituted both an unfair method of competition 
and an unfair act or deceptive practice. One reason the Commission 
gives for basing liability on Section 5 alone is that, unlike liability 
theories premised on infringements of the Sherman or Clayton Acts, 
private parties cannot use FTC intervention premised on Section 5 alone 
to support claims for treble damages in subsequent federal antitrust 
suits. The Commission's assumption that a pure Section 5 theory will 
have no spillover effects seems to be important to the result it 
reaches. Footnote 8 of the Analysis says:
     It is worth noting that, because the proposed complaint alleges 
stand-alone violations of Section 5 rather than violations of Section 5 
that are premised on violations of the Sherman Act, this action is not 
likely to lead to well-founded treble damage antitrust claims in 
federal court.
If the absence of spillover effects in private litigation is important 
to the Commission's decision, then the proposed settlement must account 
for the impact of FTC decisions upon the prosecution of claims based on 
state, as well as federal, causes of action.
    The Commission overlooks how the proposed settlement could affect 
the application of state statutes that are modeled on the FTC Act and 
prohibit unfair methods of competition (``UMC'') or unfair acts or 
practices (``UAP''). The federal and state UMC and UAP systems do not 
operate in watertight compartments. As commentators have documented, 
the federal and state regimes are interdependent. See, e.g., Dee 
Pridgen, Consumer Protection and the Law 214-22 (2007 Edition) 
(discussing use of FTC precedent to interpret state consumer protection 
statutes); Lawrence Fullerton et al., Reliance on FTC Consumer 
Protection Law Precedents in Other Legal Forums (American Bar 
Association, Section of Antitrust Law, Working Paper No. 1, July 1988) 
(describing how FTC consumer protection actions inform application of 
state law). By statute or judicial decision, courts in many states 
interpret the state UMC and UDP laws in light of FTC decisions, 
including orders. As a consequence, such states might incorporate the 
theories of liability in the settlement and order proposed here into 
their own UMC or UAP jurisprudence. A number of states that employ this 
incorporation principle have authorized private parties to enforce 
their UMC and UAP statutes in suits that permit the court to impose 
treble damages for infringements.
    If the Commission desires to deny the reasoning of its approach to 
private treble damage litigants, the proposed settlement does not 
necessarily do so. If the Commission's assumption of no spillover 
effects is important to its decision, a rethink of the proposed 
settlement and order seems unavoidable.

The Basis of Liability

    The proposed settlement treats the Respondent's conduct as both an 
unfair method of competition and an unfair act or practice. When a 
public agency pleads alternative theories of liability, especially in a 
settlement with a party that appears to lack the means to threaten 
credibly to litigate, it should specify the distinctive contributions 
of each theory to the prosecution of the matter. Suppose that an agency 
comfortably could premise its allegation of infringement upon theory A. 
If the agency decides to premise liability upon theory B as well as 
theory A, it is good practice for the agency to explain what theory B 
adds to the mix.
    The Analysis here does not discuss why the Commission endorses 
separate UMC and UAP claims. The Analysis does not integrate the two 
theories of liability. A fuller effort to explain the relationship 
between the theories of liability in the Analysis would have led the 
Commission to confront anomalies in its exposition of the decision to 
prosecute. For example, the framework that the Analysis presents for 
analyzing the challenged conduct as an unfair act

[[Page 5855]]

or practice would appear to encompass all behavior that could be called 
a UMC or a violation of the Sherman or Clayton Acts. The Commission's 
discussion of the UAP liability standard accepts the view that all 
business enterprises--including large companies--fall within the class 
of consumers whose injury is a worthy subject of unfairness scrutiny. 
If UAP coverage extends to the full range of business-to-business 
transactions, it would seem that the three-factor test prescribed for 
UAP analysis would capture all actionable conduct within the UMC 
prohibition and the proscriptions of the Sherman and Clayton Acts. 
Well-conceived antitrust cases (or UMC cases) typically address 
instances of substantial actual or likely harm to consumers. The FTC 
ordinarily would not prosecute behavior whose adverse effects could 
readily be avoided by the potential victims--either business entities 
or natural persons. And the balancing of harm against legitimate 
business justifications would encompass the assessment of 
procompetitive rationales that is a core element of a rule of reason 
analysis in cases arising under competition law.
    The prospect of a settlement can lead one to relax the analytical 
standards that ordinarily would discipline the decision to prosecute if 
the litigation of asserted claims was certain or likely. This is 
particularly the case when, as in this matter, the respondent has 
indicated during negotiations that, for various reasons, it will not 
litigate and will accept a settlement. If the Commission had in mind 
specific analytical grounds for including both theories of liability 
(for example, because each theory standing alone contained weaknesses 
as foundations for the settlement), the Analysis omits them. In the 
logic of the Analysis, the UAP theory subsumes the UMC standard and 
makes the UMC provision superfluous. If the UAP concept is so broad, it 
is not evident what reasoning in this case supports the parallel 
inclusion of the UMC claim. More generally, it seems that the 
Commission's view of unfairness 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.
[FR Doc. E8-1801 Filed 1-30-08: 8:45 am]
[Billing CODE 6750-01-S]