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The Federal Trade Commission (FTC) has announced the most important resolution of a standards-related enforcement action since Rambus, and possibly since its landmark settlement with Dell Computer in 1995. At issue was whether a licensing promise made by a patent-owning participant in a standards development process is binding upon someone that later owns the same patent. In a split 3 – 2 decision, the FTC has ruled that it does, when the later owner exploits the “lock in” of the marketplace by dramatically increasing the cost to license the patent in question.

The decision is significant for a number of reasons. First, the marketplace has long worried over whether such promises can be relied upon in the long term. Second, the sole business of the defendant in the action, Negotiated Data Solutions (N-Data), is licensing patents – in other words, a “troll,” in market parlance. Trolls are viewed by vendors and end users alike as a pernicious and increasing threat.

Next, the reliance upon promises made with respect to patents is of concern not only in the standard setting context, but with respect to open source software as well. The details of the settlement will provide significant guidance as to how the regulators would view similar conduct in an open source setting. Moreover, in the case of N-Data, the FTC has acted aggressively while acknowledging that the actions at issue might not rise to the level of violating relevant antitrust laws. In doing so, the Commissioners provide strong assurance to participants in standard setting that the FTC recognizes the importance of standards in the modern world. Finally, the details of the actual settlement demonstrate a willingness on the part of the FTC to craft a detailed and savvy set of requirements that addresses the realities of actual licensor-licensee conduct in the marketplace.

The decision is dramatic for two additional reasons: unlike the FTC’s prosecution of Rambus (which took several years to run its course), the existence of the complaint and the terms of the settlement in the N-Data were revealed simultaneously, making the impact of the decision greater by the element of surprise. That surprise is a welcome one, because the patents in question relate to the Ethernet standard, which is implemented in millions of computers world wide.

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• Andy Updegrove

  

  Andy Updegrove is a partner and founder of Gesmer Updegrove LLP, a Boston-based technology law firm, and has represented and helped structure more than 80 worldwide standard setting, open source, promotional and advocacy consortia over the past 20 years. He has also represented hundreds of both emerging as well as established technology companies, and is the founder and editor of both the popular website http://www.consortiuminfo.org and the widely-read Standards Blog

• Karen Copenhaver

  

  Karen Copenhaver is a partner in Choate, Hall & Stewart LLP ‘s Business & Technology practice focusing on technology transfer and licensing of intellectual property with a specific emphasis on open source business models. Most recently, Copenhaver was executive vice president and general counsel at Black Duck Software, Inc.