As I noted last week, the Federal Trade Commission ruled unanimously that computer memory technology company Rambus, Inc. had violated the antitrust laws by "gaming" the standard setting process.  After the Commissioners of the FTC review the pleadings of the FTC's own Complaint Counsel and Rambus's lawyers in the final phase of their deliberations, the Commissioners will decide what penalties Rambus will have to bear for its actions.

But what does the FTC's decision mean in the bigger picture of the technology industry?  One clue comes from a complaint that was quietly filed in the US District Court for the District of Delaware on August 1 — the day before the FTC announced its decision.  In what could not be better timing, this new complaint alleges a nearly identical course of conduct by French telecommunications giant Alcatel SA in an IEEE standard setting process.  Or, as stated in the complaint filed by Santa Clara, California-based Foundry Networks, Inc.  (Nasdaq: FDRY), Alcatel "duped" the IEEE into adopting a user authentication standard that would infringe Alcatel's patents pending, setting a classic "submarine patent" trap for the industry after it became "locked in" through adoption of that standard.

So far, the case doesn't seem to have caused so much as a ripple in the press; I only know about it through Alan McGrath, who spotted what is apparently the only article written to date about this action.  The article appears at a subscription-based legal site, and summarizes the allegations contained in the complaint.

Alan was kind enough to send me a copy of that complaint, which reads like Son of Rambus, but with a few interesting twists.  Here's what it says.

According to the Foundry complaint, Alcatel participated in the 802.1X IEEE Working Group that was tasked in the late 1990s with creating a new user authentication protocol to govern port-based access LANs.  Alcatel participated in that effort, and on March 15, 2000 filed a patent that Alcatel would later assert was “essential” to implementing the user authentication standard that was formally adopted on June 14, 2001.  Alcatel filed a “continuation” of its patent a week later that was:

…designed and prosecuted with the 802.1X standard in mind and with the specific intent of subsequently filing patent infringement cases against users of the 802.1X standard….Alcatel planned to file [the continuation] prior to IEEE’s adoption of the 802.1X standard.

As you will have guessed by now, Alcatel did not disclose either the original patent filing while it was participating in the IEEE Working Group, nor did it disclose its continuation filing until many vendors had already implemented the standard.

On January 15, 2002, the Alcatel patent was issued as U.S. Patent No. 6,339,830, titled Deterministic User Authentication Service for Communication Network, and in April it first contacted Foundry to inform it of the fact that the patent would be infringed by Foundry’s implementation of the 802.1X standard.

It is at this point that the story first begins to diverge from the Rambus facts, because instead of offering to license the single patent that had issued, Alcatel was only willing to offer a package of patents, only one of which was essential to implement the standard.  Foundry responded that it would not pay up, since Alcatel had failed to disclose the patent in timely fashion during the IEEE process.

Only on January 13, 2003 did Alcatel inform IEEE of its contention that its patent would be infringed by the 802.1X standard, and offer to license that patent on reasonable and nondiscriminatory (RAND) terms, although the complaint indicates that Alcatel may have been inconsistent in its statements regarding whether the patent was, or was not “essential.”  It also did not mention that by “reasonable,” it apparently was only willing to offer the patent as part of a package. 

The continuation patent was issued on March 29, 2005, and the complaint alleges that Alcatel believes that claims under this patent are essential to implementing the standard as well. 

On June 21, 2005, Alcatel finally sued Foundry for patent infringement in the same court in which Foundry has now brought its action.

As a result of this course of conduct, Foundry alleges in its complaint that four companies in the Alcatel corporate family:

[D]uped the Institute of Electrical and Electronics Engineers  (“IEEE”) into adopting an important, industry-wide standard without disclosing patent applications and providing licensing assurances required by the IEEE’s Bylaws, and then…subsequently sued Foundry for patent infringement after Foundry had implemented the standard in reliance on the integrity of the IEEE standard-setting process, reasonably believing that it could practice the standard without being subjected to claims of patent infringement.  In essence, Alcatel set an illegal trap for Foundry, and once Foundry was locked in, Alcatel damaged Foundry by embroiling it in an expensive patent —infringement litigation.  As a result, Alcatel has monopolized or intended to monopolize the market for which the IEEE standard pertains — the technology market for user authentication for port-based network access to LANs….

In so doing, the complaint alleges, Alcatel violated the U.S. Sherman Antitrust Act, and also engaged in common law fraud.  Moreover, its insistence on licensing only a package of patents constitutes an illegal “tying” arrangement under the antitrust laws (e.g., conditioning the availability of one product, right or service on the purchase, at a greater price, of purchasing unwanted products, rights or services as well).

There are more facts, allegations and legal claims in the complaint upon which I will write on in the future.  And, of course, Alcatel’s side of the story remains to be heard, as it will when future pleadings are filed.  But for now, the case will be significant in a number of ways, including the following:

1.  What effect will the FTC decision have on this litigation?  Will Alcatel fight, settle, or modify its licensing demands?

2.  Will the FTC’s opinion, and now the Alcatel case, provide further fuel for those that are pushing to permit “ex ante” licensing terms disclosures, especially since one of the most advanced efforts in that regard is now occurring within the IEEE?

3.  Will the public argument over the tying term once again underline the intrinsic weakness of the concept of  a RAND licensing commitment, without further definition of what that term in fact means?

I’ll continue to cover this case as further pleadings are filed. 

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