Dell Computer Corp.; Consent Agreement With Analysis To Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 931-0097]

Dell Computer Corp.; Consent Agreement With Analysis To Aid

Public Comment

AGENCY: Federal Trade Commission.

ACTION: Consent agreement.

-----------------------------------------------------------------------

SUMMARY: In settlement of alleged violations of federal law prohibiting

unfair acts and practices and unfair methods of competition, this

consent agreement, accepted subject to final Commission approval, would

require Dell not to enforce patent rights against computer

manufacturers using the VL-bus, a mechanism to transfer instructions

between a computer's central processing unit and peripherals such as a

video monitor, which had been accepted by the Video Electronics

Standards Association (VESA) as the industry standard. The Commission

had alleged that Dell, as a member of the VESA, did not disclose to

other VESA members that it held patent rights to the VL-bus technology

at the time the VESA standard for such technology was adopted and then

later attempted to enforce those patent rights against certain VESA

members, in an effort to unilaterally impose costs on its rivals.

DATES: Comments must be received on or before January 22, 1996.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 6th Street and Pennsylvania Avenue NW., Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT:

William J. Baer, Bureau of Competition, Federal Trade Commission, H-

374, 6th Street and Pennsylvania Avenue NW., Washington, DC 20580.

(202) 326-2932.

SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Sec. 2.34 of the

Commission's rules of practice (16 CFR 2.34), notice is hereby given

that the following consent agreement containing a consent order to

cease and desist, having been filed with and accepted, subject to final

approval, by the Commission, has been placed on the public record for a

period of sixty (60) days. Public comment is invited. Such comments or

views will be considered by the Commission and will be available for

inspection and copying at its principal office in accordance with

Sec. 4.9(b)(6)(ii) of the Commission's rules of practice (16 CFR

4.9(b)(6)(ii)).

Agreement Containing Consent Order To Cease and Desist

The Federal Trade Commission (``Commission'') having initiated an

investigation of certain acts and practices of the Dell Computer

Corporation (``Dell''), and it now appearing that Dell Computer

Corporation, hereinafter sometimes referred to as proposed respondent,

is willing to enter into an agreement containing an order to cease and

desist from engaging in the acts and practices being investigated, and

providing for other relief,

It is hereby agreed by and between the proposed respondent, by its

duly authorized officer and its attorney and counsel for the Commission

that:

1. Proposed respondent Dell is a corporation organized, existing

and doing business under and by virtue of the laws of the State of

Delaware, with its offices and principal place of business located at

2214 West Braker Lane, Austin, Texas 78758.

2. Proposed respondent admits all the jurisdictional facts set

forth in the draft of complaint.

3. Proposed respondent waives:

(a) Any further procedural steps;

(b) The requirement that the Commission's decision contain a

statement of findings of fact and conclusions of law;

(c) All rights to seek judicial review or otherwise to challenge or

contest the validity of the order entered pursuant to this agreement;

and

(d) Any claim under the Equal Access to Justice Act.

4. Proposed respondent shall submit with this agreement an initial

report signed by the proposed respondent setting forth in precise

detail the manner in which the proposed respondent will comply with

Paragraph IV of the order when and if entered. Such report will not

become part of the public record unless and until the accompanying

agreement and order are accepted by the Commission. At the time such

report is submitted, proposed respondent may request confidentiality

for any portion thereof with a precise showing of justification

therefor.

5. This agreement shall not become part of the public record of the

proceeding unless and until it is accepted by the Commission. If this

agreement is accepted by the Commission it, together with the draft of

complaint contemplated thereby, will be placed on the public record for

a period of sixty (60) days and information in respect thereto publicly

released. The Commission thereafter may either withdraw its acceptance

of this agreement and so notify the proposed respondent, in which event

it will take such action as it may consider appropriate, or issue and

serve its complaint (in such form as the circumstances may require) and

decision, in disposition of the proceeding.

6. This agreement is for settlement purposes only and does not

constitute an admission by proposed respondent that the law has been

violated as alleged in the draft of complaint, or that the facts as

alleged in the draft complaint, other than jurisdictional facts, are

true.

7. This agreement contemplates that, if it is accepted by the

Commission, and if such acceptance is not subsequently withdrawn by the

Commission pursuant to the provisions of Sec. 2.34 of the Commission's

rules of practice, the Commission may, without further notice to the

proposed respondent, (1) issue its complaint corresponding in form and

substance with the draft complaint and its decision containing the

following order to cease and desist in disposition of the proceeding,

and (2) make information public in respect thereto. When so entered,

the order to cease and desist shall have the same force and effect and

may be altered, modified, or set aside in the same manner and within

the same time provided by statute for other orders. The order shall

become final upon service. Delivery by the U.S.

[[Page 57871]]

Postal Service of the complaint and decision containing the agreed-to

order to proposed respondent's address as stated in this agreement

shall constitute service. Proposed respondent waives any right it may

have to any other manner of service. The complaint may be used in

construing the terms of the order, and no agreement, understanding,

representation, or interpretation not contained in the order or

agreement may be used to vary or contradict the terms of the order.

8. Proposed respondent has read the proposed complaint and order

contemplated hereby. Proposed respondent understands that once the

order has been issued, it will be required to file one or more

compliance reports showing that it has fully complied with the order.

Proposed respondent further understands that it may be liable for civil

penalties in the amount provided by law for each violation of the order

after it becomes final.

Order

I

It is ordered that, as used in this order, the following

definitions shall apply:

A. ``Respondent'' or ``Dell'' means Dell Computer Corporation, its

predecessors, subsidiaries, divisions, groups, and affiliates

controlled by Dell Computer Corporation, their successors and assigns,

and their directors, officers, employees, agents and representatives.

B. ``Designated representative'' means the person appointed by Dell

to the standard-setting organization who communicates respondent's

position regarding respondent's patent rights related to any standard

under consideration by the standard-setting organization.

C. ``VESA'' means the Video Electronics Standards Association,

located at 2150 North First Street, Suite 440, San Jose, California,

95131.

D. ``VL-bus'' means the computer local bus design standard VESA

established in August 1992 for the transmission of computer information

between a computer's central processing unit and certain computer

peripheral devices.

E. ``'481 patent'' means United States patent number 5,036,481.

F. ``Commission'' means the Federal Trade Commission.

II

It is further ordered that, within thirty (30) days after the date

of this order becomes final, and until July 31, 2008, respondent shall

cease and desist all efforts it has undertaken by any means, including

without limitation the threat, prosecution or defense of any suits or

other actions, whether legal, equitable, or administrative, as well as

any arbitrations, mediations, or any other form of private dispute

resolution, through or in which respondent has asserted that any person

or entity, by using or applying VL-bus in its manufacture of computer

equipment, has infringed the '481 patent.

III

It is further ordered that, until July 31, 2008, respondent shall

not undertake any new efforts to enforce the '481 patent by

threatening, prosecuting or defending any suit or other action, whether

legal, equitable, or administrative, as well as any arbitration,

mediation, or other form of private dispute resolution, through or in

which respondent claims that any person or entity, by using or applying

VL-bus in its manufacture of computer equipment, has infringed the '481

patent.

IV

It is further ordered that, for a period of ten (10) years after

the date this order becomes final, respondent shall cease and desist

from enforcing or threatening to enforce any patent rights by asserting

or alleging that any person's or entity's use or implementation of an

industry design standard infringes such patent rights, if, in response

to a written inquiry from the standard-setting organization to

respondent's designated representative, respondent intentionally failed

to disclose such patent rights while such industry standard was under

consideration.

V

It is further ordered that, for a period of ten (10) years after

this order becomes final, respondent shall maintain the procedure for

assuring compliance with Paragraph IV of this order, as accepted by the

Commission pursuant to Paragraph 4 of the Agreement Containing Consent

Order to Cease and Desist.

VI

It is further ordered that respondent shall:

A. Within thirty (30) days after the date this order becomes final,

distribute a copy of this order, complaint and the announcement shown

in Appendix A to this order to VESA, to those members of VESA that Dell

contacted regarding possible infringement of the '481 patent, and to

any other person or entity to whom respondent has sent notice regarding

its claim that the implementation of the VL-bus standard conflicts with

or infringes the '481 patent.

B. Within thirty (30) days after the date this order becomes final,

distribute a copy of this order, complaint and the announcement shown

in Appendix A to this order to every officer and director of

respondent, and to every employee of respondent whose responsibilities

include acting as respondent's designated representative to any

standard-setting organization, group or similar body of which

respondent is a member.

C. For a period of five (5) years after the date this order becomes

final, furnish a copy of this order and complaint to each new officer

and director of respondent and to every new employee of respondent

whose responsibilities will or do include acting as respondent's

designated representative to any standard-setting organization, group

or similar body of which respondent is a member. Such copies must be

furnished within thirty (30) days after any such persons assume their

position as an officer, director or employee. For purposes of this

paragraph VI.C., ``new employee'' shall include without limitation any

of respondent's employees whose duties change during their employment

to include acting as respondent's designated representative to any

standards-setting organization, group or similar body of which

respondent is a member.

D. For a period of ten (10) years after the date this order becomes

final, respondent shall furnish each standard-setting organization of

which it is a member and which it joins a copy of the order and

respondent shall identify to each such organization the name of the

person who will serve as respondent's designated representative to the

standard-setting organization.

VII

It is further ordered that respondent shall:

A. Within ninety (90) days after the date this order becomes final,

and annually thereafter for five (5) years on the anniversary of the

date this order becomes final, and at such other times as the

Commission may, by written notice to the respondent, require, file a

verified written report with the Commission setting forth in detail the

manner and form in which the respondent has complied and is complying

with this order.

B. For a period of ten (10) years after the date this order becomes

final, maintain and make available to

[[Page 57872]]

Commission staff, for inspection and copying upon reasonable notice,

records adequate to describe in detail any action taken in connection

with the activities covered by Paragraphs V and VI of this order.

C. Notify the Commission at least thirty (30) days prior to any

proposed change in respondent such as dissolution, assignment or sale

resulting in the emergence of a successor corporation, the creation or

dissolution of subsidiaries, or any other change in respondent that may

affect compliance obligations arising out of this order.

Appendix A

Announcement

Dell Computer Corporation has entered into a consent agreement

with the Federal Trade Commission. Pursuant to this consent

agreement, the Commission issued an order on [Date] that prohibits

Dell from enforcing its United States patent number 5,036,481

against any company for such company's use of the Video Electronics

Standards Association's VL-bus standard.

For more specific information, please refer to the FTC order

itself, a copy of which is attached for your information.

General Counsel,

Dell Computer Corporation.

Dell Computer Corporation, Analysis of Proposed Consent Order To Aid

Public Comment

The Federal Trade Commission has accepted an agreement to a

proposed consent order from Dell Computer Corporation (``Dell''),

which is located in Austin, Texas. The agreement would settle

charges by the Commission that the proposed respondent violated

Section 5 of the Federal Trade Commission Act by engaging in

practices that restricted competition related to VL-bus design

standards for personal computing systems.

The proposed consent order has been placed on the public record

for sixty (60) days for reception of comments by interested persons.

Comments received during this period will become part of the public

record. After sixty (60) days, the Commission will again review the

agreement and decide whether it should withdraw from the agreement

or make final the agreement's proposed order.

The Complaint

The complaint prepared for issuance by the Commission along with

the proposed order alleged that Dell has engaged in acts and

practices that have unreasonably restrained competition to use the

VL-bus design for personal computers. The complaint alleges that in

February 1992 Dell became a member of the Video Electronics

Standards Association (``VESA''), a non-profit standards-setting

association composed of virtually all major U.S. computer hardware

and software manufacturers. At or about the same time, VESA began

the process of setting a design standard for a computer bus design,

later to be known as the VESA Local Bus or ``VL-bus''. Like all

computer buses, the VL-bus carries information or instructions

between the computer's central processing unit and the computer's

peripheral devices such as a hard disk drive, a video display

terminal, or a modem.

According to the complaint, by June 1992 VESA's Local Bus

Committee, with Dell representatives sitting as members, approved

the VL-bus design standard, which improved upon then-existing

technology by more quickly and efficiently meeting the transmission

needs of new, video-intensive software. One year earlier, in July

1991, Dell had received United States patent number 5,036,481 (the

``'481 patent''), which, according to Dell, gives it ``exclusive

rights to the mechanical slot configuration used on the motherboard

to receive the VL-bus card.''

The complaint states that on July 20, 1992, Dell voted to

approve the preliminary proposal for the VL-bus standard. As part of

this approval, a Dell representative certified in writing that, to

the best of his knowledge, ``this proposal does not infringe on any

trademarks, copyrights, or patents'' that Dell possessed. After

committee approval of the VL-bus design standard, VESA sought the

approval of the VL-bus design standard by all of its voting members.

On August 6, 1992, Dell's representative approved the final VL-bus

design standard. As part of its approval, a Dell representative

again certified in writing that, to the best of his knowledge,

``this proposal does not infringe on any trademarks, copyrights, or

patents'' that Dell possessed. At no time during the standard-

setting process did Dell disclose to VESA's Local Bus Committee the

existence of the '481 patent.

The complaint alleges that after VESA's VL-bus design standard

became very successful, having been included in over 1.4 million

computers sold in the eight months immediately following its

adoption, Dell informed certain VESA members who were manufacturing

computers using the new design standard that their ``implementation

of the VL-bus is a violation of Dell's exclusive rights.'' Dell

demanded that these companies meet with its representatives to

``determine * * * the manner in which Dell's exclusive rights will

be recognized * * *.'' Dell followed up its initial demands by

meeting with several companies, and it has never renounced the

claimed infringement.

The complaint also alleges that the purpose or effects of the

challenged acts or practices have been to restrain competition

unreasonably in the following ways:

(a) Industry acceptance of the VL-bus design standard was

hindered because some computer manufacturers delayed their use of

the design standard until the patent issue was clarified.

(b) Systems utilizing the VL-bus design standard were avoided

due to concerns that patent issues would affect the VL-bus' success

as an industry design standard.

(c) The uncertainty concerning the acceptance of the VL-bus

design standard raised the costs of implementing the VL-bus design

as well as the costs of developing competing bus designs.

(d) Willingness to participate in industry standard-setting

efforts have been chilled.

If a company misrepresents its patent rights to a standard-

setting-organization, thereby leading the organization to adopt a

particular standard that may infringe on the company's patent

rights, the company's later efforts to take advantage of market

power resulting from the standard, rather than from some inherent

value of the patent, constitutes a violation of Section 5. Cf.

Potter Instrument Co. v. Storage Technology Corp., 641 F.2d 190 (4th

Cir.) (court would estop enforcement of patent where patent holder

participated in a standard-setting process, intentionally failed to

disclose the existence of its patent, and waited six years until the

standard was widely adopted before seeking to enforce the patent),

cert. denied 454 U.S. 832 (1981); III P. Areeda, Antitrust Law

para.707h at 141-42 (1978) (negligent misrepresentation to patent

office can constitute exclusionary act for equitable antitrust

purposes).

The Proposed Consent Order

Part I of the order covers definitions. These definitions make

clear that the consent order applies to the directors, officers,

employees, agents and representatives of Dell. The order also

defines the terms VL-bus, VESA, and ``designated representative,''

which means the person appointed by Dell to the standard-setting

organization who communicates Dell's position regarding its patent

rights related to any standard under consideration by the standard-

setting organization.

Part II of the order requires Dell to cease and desist from all

enforcement efforts where it has asserted that any person or entity,

by using or applying VL-bus in its manufacture of computer

equipment, has infringed Dell's '481 patent.

Part III of the order prohibits Dell from undertaking any new

efforts to enforce the '481 patent in which Dell would claim that

any person or entity, by using or applying VL-bus in its manufacture

of computer equipment, has infringed the '481 patent.

Part IV of the order requires that for a period of ten (10)

years after the date the order becomes final, Dell shall cease and

desist from enforcing or threatening to enforce any patent rights by

asserting or alleging that any person's or entity's use or

implementation of an industry design standard infringes such patent

rights if, in response to a written inquiry from the standard-

setting organization to respondent's designated representative, Dell

intentionally failed to disclose such patent rights while such

industry standard was under consideration.

Part V of the order requires that for a period of ten (10) years

after this order becomes final, Dell shall maintain the procedure

for assuring compliance with Paragraph IV of the order consistent

with a compliance procedure Dell has submitted to the Commission.

Part VI of the order requires Dell to distribute a copy of this

order, complaint and an announcement to VESA, to those members of

VESA that Dell contacted regarding possible infringement of the '481

patent, and to other persons respondent has sent notice regarding

the '481 patent claim.

Part VI also requires that Dell distribute a copy of this order,

complaint and the

[[Page 57873]]

announcement to new officers and directors of Dell; to every employee

of Dell whose responsibilities include acting as Dell's designated

representative to any standard-setting organization, group or

similar body of which respondent is a member; and to each standard-

setting organization of which Dell is a member. Dell must also

identify to each standard-setting organization it joins the name of

the person who will serve as its designated representative to the

standard-setting organization.

Part VII requires Dell to file compliance reports for five

years.

Donald S. Clark,

Secretary.

Dissenting Statement of Commissioner Mary L. Azcuenaga in Deli Computer

Corp.

[File No. 931-0097]

Today, the Commission accepts for public comment a consent order

that prohibits Dell Computer Corp. (``Dell'') from attempting to

enforce its ``'481 patent'' against anyone ``using or applying VL-

bus in its manufacture of computer equipment,'' because Dell failed

to warn the Video Electronics Standards Association (``VESA'') of

Dell's intellectual property rights when VESA adopted its computer

local bus design standard (``VL-bus''). Because the complain 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.

VESA is a private standard-setting association, the members of

which include both computer hardware and software manufacturers. In

early 1992, a VESA committee developed a proposed standard for a

computer bus to carry information between the central processing

unit and the peripheral devices of a computer. In August 1992, VESA

members, including Dell, voted to approve the proposed standard. The

trade association's ballot required each member's authorized

representative to VESA to sign a statement that ``to the best of my

knowledge,'' the proposal did not infringe the member company's

intellectual property rights. Dell subsequently asserted that

implementation of the VL-bus by others infringed Dell's patent

rights.

One antitrust theory might be that Dell intentionally mislead

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, and the allegations in the complaint do not seem sufficient

to support a finding of liability on the basis of this theory. I

welcome comment on the factual showing that would be necessary and

appropriate under this theory.

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. Alternatively, the Commission might impose such

a duty only if a firm returns a ballot with a certification like

VESA's, so that a firm could escape antitrust exposure by simply not

voting.

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 need 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.

[FR Doc. 95-28459 Filed 11-21-95; 8:45 am]

BILLING CODE 6750-01-M