FTC Consent agreement with Dell Computer Corporation

DELL COMPUTER SETTLES FTC CHARGES; WON'T ENFORCE PATENT RIGHTS FOR WIDELY USED COMPUTER FEATURE

In a precedent-setting decision announced November 2, 1995 , Dell Computer Corporation  agreed to drop patent claims that affect millions of personal computers using the industry standard "VL-bus". The decision follows Federal Trade Commission charges that Dell restricted competition in the personal computer industry and undermined the standard-setting process by threatening to exercise undisclosed patent rights against computer companies adopting the VL-bus standard. To settle the FTC charges, Dell has agreed not to enforce its patent rights against computer manufacturers using the VL-bus, a mechanism to transfer instructions between the computer's central processing unit and its peripherals, such as a hard disk drive or video display hardware. VL-bus is the technology of choice in computers that use "486" chips.

According to the FTC complaint detailing the charges, Dell was a member of the Video Electronics Standards Association (VESA), a non-profit standards-setting organization, when the association began setting a design standard for a computer bus design to respond to demand for faster graphics performance. VESA members, representing virtually all major U.S. computer hardware and software manufacturers, voted to approve the new VL-bus standard in 1992. As part of that approval, a Dell representative allegedly certified that he knew of no patent, trademark or copyright that the bus design would violate.

After the VESA VL-bus design standard became successful and computer manufacturers had sold more than 1.4 million personal computers incorporating the VL-bus, Dell contacted certain VESA members and asserted that it obtained a patent in 1991 that they were violating by using the VL-bus standard, the complaint alleges.

This is the first time federal law enforcement authorities have taken action against a company for acting through a standard-setting association to unilaterally seek to impose costs on its rivals through abuse of the standard-setting process, according to William J. Baer, Director of the FTC's Bureau of Competition.

"Voluntary standard-setting in high tech industries results in greater compatibility among products, which in turn gives consumers a broader range of choices," said Baer. " Open, industry-wide standards also benefit consumers because they can be used by everyone without cost. This settlement makes it clear that firms cannot commit to an open standard, and then, after it becomes successful, assert patent rights in an effort to block use of the design or drive up the price through royalty payments. In this case, Dell's certification to the Association led the industry to believe the standard was truly open. If Dell had informed the Association of its patent claims during the standard-setting process, the Association could have adopted a different standard that would not have conflicted with the patent," he said.

The FTC charged that Dell's actions were unfair and that they unreasonably restrained competition in the following ways, according to the complaint:

bulletindustry acceptance of the VESA VL-bus standard was hindered pending a resolution of the patent issue;
bulletcompanies avoided using systems incorporating the VL-bus design because they were concerned that the patent issue would chill its acceptance as the industry standard;
bulletuncertainty about acceptance of the design standard raised the cost of implementing the VL-bus design and the costs of developing competing bus designs; and
bulletwillingness to participate in industry standard-setting efforts has been chilled.

To settle the charges, Dell has agreed not to enforce its patent against computer manufacturers incorporating the VL-bus design in their products. In addition, Dell would be prohibited from enforcing any of its patent rights that it intentionally fails to disclose upon request of any standard-setting organization during the standard-setting process. The settlement also contains various reporting requirements that would assist the FTC in ensuring Dell's compliance.

FTC held  HEARINGS ON GLOBAL AND ) INNOVATION-BASED COMPETITION December 1, 1995  shortly after the Consent Agreement Amy Marasco  ANSI Vice President testified: 

The benefits and pro-competitive effects of voluntary standards are not in dispute. Standards do everything from solving issues of product compatibility to addressing consumer safety and health concerns.

The standards also allow for the systemic elimination of non-value added product differences, reduce costs, and often simplify product development. They also are a fundamental building block in international trade.

That is why the rule of reason, typically, is applied to standards activities. Weighing positive effects against anti-competitive ones, however, is not always easy to do.

One of the principal difficulties confronted by enforcement agencies and the courts when applying the rule of reason to standardization activities is that any cost benefit analysis or consideration of possible alternative standards often requires a technical expertise that these bodies normally admittedly lack.

ANSI's view is that the best alternative is to leave the resolution of technical issues to the experts who participate in the standards development process and focus, instead, on the process itself.

Focusing on the process also has the benefit of being easier for courts and enforcement agencies to analyze; providing clearer guidance to the business community; and the process can be designed and, if necessary, modified to reduce if not eliminate, the possibility of anti-competitive activity.

This has been ANSI's approach, and we believe it has been effective. In its role as the accreditor of U.S. standards developing organizations, ANSI seeks to further the integrity of the standards development process and to determine whether candidate standards meet the necessary criteria to become American National Standards.

ANSI approval of these standards is intended to verify that the principles of openness and due process have been followed and that a consensus of all interested parties has been reached. These requirements ensure that the playing field for standards development is a level one.

Standards are market driven. If a standard is developed according to ANSI requirements, there should be sufficient evidence that the standard has the substantive reasonable basis for its existence and that it meets the needs of producers, users, and other interest groups.

ANSI absolutely agrees with the Dell consent agreement to the extent it applies to situations when a participant in the standards development process intentionally and deliberately fails to disclose that his or her organization holds a patent relating to the standard in question in an attempt to gain an unfair competitive advantage. This would violate ANSI's and ISO's and IEC 's patent policies as well.

The Commission's vote to accept the proposed settlement for public comment was not unanimous.  The vote was 4-1, with Commissioner Mary L. Azcuenaga dissenting. In her dissenting statement, Commissioner Azcuenaga said, "Because the complaint does not allege and the evidence does not support a violation of Section 5 of the FTC Act under any established theory of law, and because under any novel theory the competitive implications of the conduct alleged remain unclear, I dissent...One antitrust theory might be that Dell intentionally misled VESA regarding the scope of its patent rights; that VESA, relying on Dell's misrepresentations, adopted a standard that conflicted with Dell's rights; and that as a result of the standard, Dell acquired market power. No evidence supports a finding of such intentional conduct...Another Section 5 theory might be that by participating in a private trade association's standard-setting activities, a firm assumes an affirmative duty to identify the boundaries of its intellectual property rights and to warn the association of any potential conflicts...Adoption of this novel theory of liability may affect a range of standard-setting organizations. In creating a new antitrust-based duty of care for participants in the voluntary standard-setting process, a host of questions needs to be resolved. I welcome public comment on the appropriate nature and scope of any such duty, and I look forward to reassessing the case at the end of the comment period."

Impact Assessment This decision has implications for all companies that depend upon IPRs and who participate in standards development activities.

bulletcompanies must be sure their representatives to standards committees are properly reflecting corporate interests.
bulletcompanies must strategically evaluate the pros and cons of participating in standards development work when such participation generally requires commitment to license their proprietary technology on "fair and non discriminatory terms and conditions."
bulletthe failure to disclose remedy in this case caused Dell to forego its rights to enfoce its patents…this sets a precedent in future similar situations for companies to face similar consequences for failure to disclose when asked.
bulletIPR and patent policies of major organizations such as ANSI, ISO/IEC, IETF and the ITU continue to evolve. Companies that depend upon IPR should be sure that their interests are properly represented in these reviews

Commissioner Mary L. Azcuenaga dissented to the order against Dell Computer Corporation that the Commission accepted for public comment last fall. Her opinions as expressed in a speech entitled ANTITRUST AND INTELLECTUAL PROPERTY IN THE YEAR 2000 REMARKS OF COMMISSIONER MARY L. AZCUENAGA  FEDERAL TRADE COMMISSION BEFORE THE AMERICAN INTELLECTUAL PROPERTY LAW ASSOCIATION LA QUINTA, CALIFORNIA JANUARY 24, 1996 offer great  insight to the FTC decision making process.  The press release announcing the settlement characterized Dell as "precedent- setting." Before discussing the merits of the case, let me offer a preliminary observation. Dell is an unlitigated consent agreement based on a novel antitrust theory. It is important for members of the bar to follow what the Commission does in unlitigated consents because such orders can alert you to new enforcement concerns. But it is also important to remember that consent orders have much less value as a basis for predicting liability than do litigated decisions. As a precedent-setting matter in the sense that it sets forth a new Commission theory of liability, the Dell case has attracted considerable attention, including a comment filed by your American Intellectual Property Law Association. In the spirit of full disclosure, I should say that I cast the lone dissenting vote on the case.

Precedent-setting cases are the lifeblood of antitrust, as economic thinking evolves and as new industries and markets are created. It is well to keep in mind that innovation in accomplishing anticompetitive ends occasionally occurs as well as innovation in developing new products. Section 5 of the Federal Trade Commission Act, more than the Sherman Act and the Clayton Act, has a degree of flexibility and provides a useful bulwark against new forms of anticompetitive conduct and anticompetitive conduct that may not violate the Sherman Act or the Clayton Act. But a degree of caution is in order in using this authority. Any new theory should have a sound anticompetitive rationale, and before adopting such a theory, the Commission should be able to articulate the rationale and the evidentiary basis for concluding that the rationale applies in the particular case.

The Dell order deals with alleged abuse of the standards setting process by a patent holder. The Video Electronics Standards Association ("VESA") is a private standard-setting organization, including as members both computer hardware and software manufacturers. In 1991-92, a VESA committee developed a standard for a computer bus design, which became known as the VESA Local Bus or "VL-bus." The bus carries information or instructions between the computer's central processing unit and peripheral devices. In August 1992, VESA members, including Dell, voted to approve VESA's VL-bus standard. The VESA ballot required each member's authorized voting representative to sign a statement that "to the best of my knowledge," the proposal did not infringe the member company's intellectual property rights.

According to the Commission's complaint, after adoption of the standard, the VL-bus design was incorporated into many computers. The heart of the problem is contained in the complaint allegation that Dell subsequently asserted that the "implementation of the VL-bus [by other computer manufacturers] is a violation of Dell's exclusive rights." Dell allegedly based this claim on its ""481 patent," which was granted in July 1991 and related to the mechanical slot configuration used on the motherboard to receive the VL-bus card. For purposes of antitrust analysis, it is important to note that the complaint did not allege that Dell's representative to VESA had any knowledge of the coverage of the "481 patent or of the potential infringement by the VL-bus at the time he cast the ballot.

Dell might have been a routine antitrust case. A traditional antitrust analysis of Dell's conduct would have centered on two questions: whether Dell intentionally misled VESA into adopting a VL-bus standard that was covered by Dell's "481 patent and whether as a result of the adoption of such a standard, Dell obtained market power beyond that lawfully conferred by the patent. If Dell had obtained market power by knowingly or intentionally misleading a standards-setting organization, it would require no stretch of established monopolization theory to condemn that conduct. Indeed, Section IV of the Commission's cease and desist order against Dell seems to address precisely such a traditional antitrust violation. It prohibits Dell's enforcement of intellectual property rights only if in response to a written inquiry "respondent intentionally failed to disclose such patent rights" during the standards-setting process (emphasis added). If the case had gone only this far, I doubt that the order would have been controversial.

The novelty of Dell, the reason it has been characterized as precedent-setting, is that the order prohibits the company from enforcing the "481 patent without any allegation that Dell intentionally and knowingly misled VESA and without any allegation that the company obtained market power as a result of the misstatement at issue. Although Dell's voting representative to VESA indicated on the ballot that "to the best of my knowledge" the VL-bus standard did not infringe a patent right, as I mentioned a moment ago, the complaint makes no allegation that he was aware either of the patent or of the potential infringement at the time the ballot was cast. Consistent with the absence of such allegations in the pleadings, I am not aware of any reliable evidence to support a claim that the representative had any such knowledge. Moreover, the circumstances surrounding the process of adopting the VL-bus standard do not suggest deliberate manipulation of the process by Dell. For example, the complaint does not allege (nor am I aware of evidence to suggest) that Dell steered the VESA standards committee toward its patented technology.

The way in which the Commission handles the factual questions of intent and knowledge is critical to the policy issue at the core of this case. It is one thing to prohibit a knowing misrepresentation or an intentional manipulation because under that standard it is easy to see how to avoid liability -- keep your people honest. It is quite another matter to find liability on the basis of constructive knowledge or unsubstantiated inferences. It is always possible to assert that Dell "must have" known of the patent, because obviously some people at Dell did know about the patent. That sort of logic leads to a strict liability standard, under which a company would place its intellectual property at risk simply by participating in the standard setting process. No matter how much money, time and talent a company might devote to avoiding mistakes in the certification process, the company would know that a mistake was still possible, and a single mistake could be very costly.

A second notable omission in the Dell complaint is the omission of an allegation that the company acquired or extended market power. Instead, paragraph nine of the complaint alleges that Dell unreasonably restrained competition in four ways: (1) industry acceptance of the VL-bus was hindered; (2) systems utilizing the VL-bus were avoided; (3) uncertainty concerning the acceptance of the VL-bus design standard raised the costs of implementing the VL-bus design and competing bus designs; and (4) willingness to participate in standards-setting has been chilled. Assuming the allegations are true, none of them suggests that Dell would have acquired the power to control price and output. Indeed, if, as appears to be the case, computer producers readily could switch to bus designs that do not incorporate Dell's technology, no monopoly seems possible.

In these circumstances, finding a Section 5 violation in the absence of any allegation of a knowing or intentional misrepresentation imposes a duty of disclosure on Dell above and beyond what VESA itself apparently required in its ballot. VESA asked the voting representative to state that "to the best of my knowledge," the proposal does not infringe any intellectual property rights. The association might have, but did not, request each participant to review the complete patent portfolio of the company and disclaim any intellectual property rights to matters covered by the standard. Had that been the standard, the process of collecting votes likely would have been very prolonged and perhaps even impossible. VESA could have structured its process in this more exacting way. Perhaps there is a good reason why it did not.

Under the Dell order, a participant in a VESA-like standards process would be well advised not only carefully to review its patent portfolio before permitting its voting representative to sign a ballot, but if it has highly valuable intellectual property, to consider not putting it at risk by not voting at all. The threat that voting on a standard might result in the loss of a company's intellectual property rights may dissuade some firms from participating in the standards-setting process in the first place. That would be a curious result indeed for an order resting on a complaint that alleges, as an anticompetitive effect, that "[w]illingness to participate in industry standard- setting efforts have [sic] been chilled."

The Dell Section 5 duty of disclosure to standard-setting organizations appears to be even more rigorous than a patent applicant's duty of disclosure to the Patent and Trademark Office. Two standards have been applied by the courts in determining whether there was inequitable conduct before or fraud on the Patent and Trademark Office (PTO). First, in order to prove the fraud on the PTO necessary to make out a Walker Process, monopolization claim, a party must make out a common law fraud claim, including proof of a material misrepresentation, intentionally made to deceive, reasonably relied on by the PTO. Second, although the showing of inequitable conduct as a defense to a patent infringement claim is lower than that necessary to establish common law fraud, the Court of Appeals for the Federal Circuit nonetheless requires clear and convincing evidence that the patent applicant failed to disclose material information known to the applicant or that he submitted false information with the intent to act inequitably. The premise of this inequitable conduct theory is that "a person who obtains a patent by intentionally misleading the PTO cannot enforce the patent."

I am not suggesting that decisions of the Court of Appeals for the Federal Circuit in patent cases do or should control in cases under Section 5 of the FTC Act. What I am suggesting is that it may be anomalous for our legal system to establish a more rigorous duty to disclose to purely private standards-setting organizations, as a condition of participating in the standards- setting process, than the duty to disclose to the Patent and Trademark Office for the purpose of obtaining a patent.

Another concern one might have about the Dell case is that the remedy it imposes seems out of proportion to the competitive harm alleged in paragraph nine of the complaint. The order prohibits Dell from enforcing the patent for its remaining term (until the year 2008), but the harm alleged was just a delay in implementing the standard. The order effectively seems to enjoin enforcement of the patent, which in turn seems much like an order invalidating a patent. A Federal Trade Commission order invalidating a patent might raise other questions regarding the Commission's authority effectively to invalidate decisions of the Patent and Trademark Office, or at least about the circumstances under which it might do so. In American Cyanamid Co. v. F.T.C., 363 F.2d 757, 772 (6th Cir. 1966), the respondents argued that the Commission had no jurisdiction to review decisions of the Patent Office. The Court of Appeals avoided the issue and observed that the Commission's order recognized the validity of the patent and merely required compulsory licensing on a reasonable royalty basis.

In Dell, it might be suggested that the order does not invalidate the patent, but rather grants a global, royalty free license to everyone implementing the VL-bus standard for the term of the patent. That argument would not necessarily carry the day for the Commission. In American Cyanamid, the Court of Appeals upheld the Commission's authority to require compulsory licensing "on a reasonable royalty basis" to remedy fraud on the patent office and misuse of the patent, but the court pointedly observed that "[w]e do not hold that the Commission has jurisdiction either directly or indirectly to invalidate or destroy a patent, nor do we hold that the Commission could order compulsory licensing without payment of reasonable royalties." 363 F.2d at 772.

Given the alleged harm, a delay in implementation of the standard, it would be difficult to fashion a remedy that corresponds closely to the harm. A conventional cease and desist order limited to prohibiting future intentional misrepresentations might have been the optimal relief. Private remedies are available to cure any harm that may have resulted from the delay in adoption of the VESA standard. If government action is deemed to be essential, the order might at most have restrained enforcement of the "481 patent long enough for VESA to change the standard, once it learned of the patent.

The public comment period for the Dell order is now over. The Commission staff is reviewing the comments and will recommend to the Commission either that it issue the order in final form without change or that appropriate changes should be made. I look forward to reading the comments and the staff analysis to see if they shed light on some of the issues I have raised and to considering whether the order should be issued in final form with or without revision.

The Dell case raises so many interesting and difficult questions that it is tempting to devote an entire speech to the case. But it is only one piece of the enforcement picture, so at this point, I will move on to touch briefly on a few issues that seem to come up at least in discussions of certain antitrust matters involving intellectual property. The notion of an essential facility is familiar to the antitrust bar, but difficult to assess. The grandaddy of all essential facilities cases involved the Terminal Railway Association, which first assembled in the 1890's the sole river bridge and related yards and tracks at St. Louis and which subsequently purchased a second, competing bridge. Although ordinary monopoly analysis or modern merger analysis might have disposed of the matter, the Supreme Court left us the legacy of the essential facility. It has been suggested that a 1990's equivalent of owning both Mississippi bridges is to own the software used on a very large installed base of computers, and various other modern day analogies have been suggested. I am not sure whether a century of practice has perfected our ability to analyze the elements of an essential facility case. Some aspects of the doctrine are still subject to serious debate. For example, how essential is essential? Although the doctrine has been criticized, it is still alive, and perhaps the next five years will provide some illumination about how well it is

 
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