FTC Settles Ethernet Patent Dispute

The U.S. Federal Trade Commission has settled a complaint against a company that owns patents to a widely used Ethernet standard, saying the patent owner was attempting to collect huge license fees despite a prior commitment to the contrary.

The settlement with Negotiated Data Solutions, or N-Data, will protect computer users from higher prices and ensure competition, the FTC said in a news release.

N-Data, in 2003, had obtained two Ethernet patents from Vertical Networks, a spin-off of National Semiconductor. N-Data attempted to collect larger patent license fees than National Semiconductor had negotiated with the Institute of Electrical and Electronics Engineers (IEEE), a standards body, back in 1994, the FTC said.

National promised the IEEE that if the group adopted a standard based on National's NWay technology, National would offer one-time licenses of US$1,0000 per company to computer manufacturers and sellers of products using the IEEE standard. But N-Data and Vertical Networks had begun collecting license fees "far in excess" of $1,000 per company, according to the FTC complaint.

N-Data obtained the patents knowing about National's commitment, and realizing the computer industry had become committed to the standard, the FTC said. N-Data refused to comply with National's commitment, and it began demanding royalties after it became expensive and difficult for the industry to switch to another standard, the FTC said in its complaint.

The settlement bars N-Data from enforcing the patents unless it has first offered the patent license based on the terms offered in 1994.

In addition to higher prices, consumers would be hurt by N-Data because the company's actions would cast doubt on the reliability of standards-setting agreements, the FTC said. "The cost of ignoring this particularly pernicious problem is too high," the commission majority wrote.

Vertical Networks, which ceased operations after it turned the patent over to N-Data, had estimated that more than 70 percent of the world's Ethernet port shipments used the NWay Ethernet patents. In early 2002, Vertical Networks set letters to more than 60 companies demanding additional licensing fees, according to the FTC complaint.

NWay technology allows two devices at opposite ends of a LAN link to exchange information and automatically configure themselves to optimize their communication, a process sometimes called autonegotiation. Standardizing on a single autonegotiation technology allowed devices made by different manufacturers to work with one another and with different generations of Ethernet equipment.

N-Data, based in Chicago, didn't immediately respond to a request for comments on the FTC settlement.

The FTC voted 3-2 to approve the settlement. N-Data violated federal law by engaging in unfair methods of competition, the FTC said.

FTC Chairman Deborah Platt Majoras voted against the settlement, saying the majority didn't establish an unfair method of competition. "The novel use of our consumer protection authority to protect large corporate members of a standard-setting organization is insupportable," she wrote in her dissent.

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