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Just how broadly does the Federal Trade Commission construe its authority to prohibit “unfair” acts? Let’s ask N-Data. In January, the FTC sued Negotiated Data Solutions for reneging on an alleged commitment to license at a specified royalty certain patents covering technologies that a standard-setting organization had incorporated into industry standards. According to the FTC’s complaint, N-Data’s conduct constituted both an unfair method of competition and an unfair trade practice in violation of the Federal Trade Commission Act. The FTC did not, however, assert claims under the primary antitrust statutes. Section 5 of the FTC’s establishing statute empowers the commission to prevent “unfair methods of competition” and “unfair or deceptive acts or practices.” The first prong typically implicates the FTC’s powers as an antitrust enforcement agency, while the second prong typically implicates its role as a consumer protection agency. But in recent decades, the courts have arguably narrowed the commission’s authority to bring actions under the unfair-competition prong if the facts do not support a violation of the primary antitrust statutes, the Sherman and Clayton acts. The FTC’s complaint against N-Data, particularly the decision to invoke its authority to challenge unfair competition outside the contours of the usual antitrust standards, thus showcases a relatively aggressive enforcement bent. Indeed, two of the five commissioners dissented from the action, suggesting that the FTC had failed to articulate clear legal standards for determining liability. N-Data will not raise this question because it has settled, agreeing to a consent order limiting its ability to enforce the patents in question. But others may not be as ready to accept this expansive view of the FTC’s Section 5 powers. PATENTS ON TARGET The N-Data case is the latest in a line of FTC cases attacking perceived misconduct by patent owners relating to the setting of technological standards. According to the FTC’s complaint, N-Data purchased patents that the Institute of Electrical and Electronics Engineers previously had incorporated into its Ethernet standard. National Semiconductor Corp. had owned the patents at the time the IEEE promulgated that standard. National committed to an upfront, one-time royalty fee of $1,000 per license. The IEEE incorporated National’s patents into its standard based allegedly on this commitment. When N-Data later acquired rights to the patents, the FTC contended, it revoked the earlier licensing commitment and charged higher royalty rates. For more than 10 years, the FTC has taken a keen interest in patent abuses in the standard-setting context. Back in 1996, the FTC sued Dell for failing to disclose certain patents during standard-setting proceedings and then, once its technology had become entrenched as the industry standard, enforcing its patents to extract supra-competitive royalties. Though suggesting that Dell had obtained monopoly power through such conduct, the FTC did not make clear whether its case against Dell, which also settled by consent order, was based on a monopolization theory under Section 2 of the Sherman Act or a more general unfair-competition claim. Then-Commissioner Mary Azcuenaga took issue with the majority’s failure to clearly articulate the legal theory it was pursuing in that matter. In following years, the FTC brought suits against Unocal (now a subsidiary of Chevron Corp.) and Rambus Inc. These later actions clearly rested on monopolization claims under the Sherman Act. According to the FTC’s theory in the cases, the patentees had acquired monopoly power by deceiving the standard-setting organizations into adopting the patentees’ proprietary technology as an industry standard. Commissioner Jon Leibowitz, one of those who voted to bring the N-Data case, also concurred in the decision to sue Rambus. In his earlier concurrence, he foreshadowed the invocation of the FTC Act as an independent basis for violation when he argued that patentee misconduct before a standard-setting organization may be challenged not only under the Sherman Act but also under Section 5′s broad proscription against unfair methods of competition. AN EXPANSIVE VIEW Even given the FTC’s forceful posture toward standard-setting misconduct, however, the N-Data case represents an escalation in that aggressiveness, which manifests itself in both the legal bases advanced by the FTC majority and the underlying facts distinguishing the case from earlier standard-setting cases. In relying on a pure Section 5 theory for its unfair-competition claim, the FTC has signaled an expansive approach to its own authority to attack conduct that violates the spirit but not necessarily the letter of the antitrust laws. The courts and the FTC have struggled over the years to develop a workable standard for evaluating those unfair-competition claims that fall outside the scope of the Sherman and Clayton acts. In the 1980s, the courts reined in, to some extent, the FTC’s powers to challenge unfair methods of competition beyond the boundaries of conventional antitrust standards, finding that the commission did not have authority to condemn conduct generally as “unfair.” Although the standards imposed by the courts were still rather abstract, many viewed this development as substantially cutting back the commission’s powers. Some even argued that the FTC should be constrained to bringing only those unfair-competition claims falling squarely within the Sherman and Clayton acts. The FTC may now have come full circle in the N-Data case, apparently attempting to resuscitate a broad view of its authority to combat unfair methods of competition in the murky area outside the Sherman and Clayton acts. Moreover, in contrast to earlier cases, the FTC did not allege that either N-Data or its predecessor-in-interest engaged in any misconduct during the standard-setting process. N-Data itself clearly acquired the patents after the Ethernet standard was set. The alleged Section 5 violation occurred, according to the FTC, when N-Data breached its predecessor’s licensing commitments by demanding higher royalties. In other words, the alleged misconduct largely amounted to the violation of a contractual or quasi-contractual obligation. There are legal remedies for that which do not require assistance from government antitrust enforcers. Some might ask why the FTC would seemingly stretch its legal authority and commit its resources in a matter where the injured parties presumably have both a remedy under contract law and the ability to vindicate their own rights. THE DISSENT SPEAKS The N-Data case raises a serious policy question about whether and to what extent the FTC can or should invoke Section 5 as an independent enforcement tool against unfair methods of competition. The concern stems from the fact that the boundaries of Section 5 are not well-defined, which means that businesses have little guidance regarding the types of conduct prohibited by the unfair-competition prong of the FTC Act. The N-Data majority sought to articulate a workable standard by identifying some limiting principles on Section 5. These principles provide that conduct that violates Section 5′s general prohibition against unfair competition must be collusive, coercive, or otherwise exclusionary and must lead to some competitive injury, even if (to quote Commissioner Leibowitz in the Rambus case) it is only “suspected or embryonic.” The majority also acknowledged that its decision to bring suit against N-Data might be controversial. The FTC commissioners certainly did not agree among themselves. In separate dissenting statements, then-Chairman Deborah Platt Majoras and Commissioner William Kovacic criticized the majority for failing to identify meaningful standards against which the alleged violation could be evaluated. Majoras (who left the commission in March) cautioned that the FTC is heading down a slippery slope by invoking its unfair-competition powers to enforce what look like contractual obligations. And she cited similar policy concerns with the FTC invoking its consumer protection powers to protect the rights of sophisticated commercial actors (such as the companies involved in IEEE standard setting), which have the wherewithal to protect their own interests. Kovacic (the new chairman) criticized the majority for offering only a muddled articulation of the relevant legal standard, seemingly merging the two distinct prongs of Section 5 together. According to his dissent, “When a public agency pleads alternative theories of liability, .�.�. it should specify the distinctive contributions of each theory to the prosecution of the matter.” These criticisms from Kovacic and Majoras will likely find support among commentators who have argued for years that Section 5 should be used sparingly when the conduct does not otherwise violate conventional antitrust standards because no succinct definition or limiting principle exists as to what conduct should be deemed “unfair.” The N-Data precedent is, of course, very new. Whether the FTC will continue to take an expansive approach to its unfair-competition powers, especially outside the standard-setting area, remains to be seen. But for the time being, at least three sitting commissioners are willing to take an aggressive position regarding the scope of their authority.
Peter M. Boyle is a partner and Svetlana S. Gans is an associate in the antitrust practice group of Kilpatrick Stockton, based in the firm’s Washington, D.C., office.

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