FTC Strengthens Standards and Open Source

The FTC is responsible for consumer protection and fair trading. In the current case it was approached by companies asked to pay high licensing charges to patenters N-Data for the use of a widespread Ethernet standard. The FTC has now proposed a consent agreement which, in the opinion of Andy Updegrove, constitutes "the most important resolution of a standards-related enforcement action" for many years. He describes the case in great depth at Consortiuminfo and sees the judgment reinforcing both reliability of legal guarantees on standards in general, and on Open Source licenses.

The central issue was whether a licensing promise made by the original patent owner still held if the patent was transferred to another owner. The current FTC ruling confirms that it does, especially if the later owner exploits its industry lock-in to drastically increase licensing costs for the patent in question.

The LF legal expert views the decision as significant for many reasons: for one thing, the question as to whether “patent promises” are binding in the long-term constantly reoccurs, both in the context of standards and in the context of many Open Source licenses. The current case is also significant as it concerns a so-called “patent troll”, that is, a company that does not provide creative input of its own, but simply exploits patents filed by others. This is basically the line of business that Negotiated Data Solutions (N-Data), the respondent in this case, is in.

In the current case, the original patent holder was National Semiconductor. In 1994, the enterprise joined an IEEE (Institute of Electrical and Electronics Engineers) working group to update an existing Ethernet standard. To ensure that devices that followed the new standard would be compatible with older devices, the working group decided to adopt National Semiconductor's “Nway” process. National Semiconductor made two valid patents available for a consideration of US$ 1,000. In 1995, the patents were assigned by the US authorities. In 1997, National Semiconductor transferred the patents to a startup founded by former staff, called Vertical Networks. In 2002, Vertical, decided to cash in on its patent portfolio and demand far higher payments from some Fast Ethernet vendors. Some refused to pay, and Vertical took legal steps. In 2003, Vertical transferred the patents to N-Data, a company founded by Vertical's general attorney with the purpose of exploiting patents. Some dealers from whome N-Data had attempted to secure higher fees were aware of National Semiconductor's original patent promise and filed a complaint with the FTC.

Based on the consent agreement accepted by the FTC, N-Data will now be obligated to offer licenses at the original price of US$ 1,000. N-Data is not entitled to increase the price unless the licensee fails to respond after a period of 120 days and does not react to reminders. The FTC's statement refers to this case as potentially "enormously harmful to standards setting", going on to state that this kind of behavior could endanger free trading. After announcing the proposed consent agreement, the FTC is open to comments for the next 30 days.