Distribution, Competition, and Antitrust / IP Law

SanDisk’s Flash Memory Patent Licenses and Royalties Do Not Support Antitrust Claims

In PNY Technologies, Inc. v. SanDisk Corp., Case No. C-11-04689 YGR (April 20, 2012) (Gonzalez Rogers, J.), the court dismissed (with leave to amend) PNY’s antitrust claims against SanDisk Corp. The case again demonstrates the vital necessity of alleging exactly how a defendant dominates which market, and how its activity has allegedly harmed competition in each relevant market. Absent such allegations, complaints will fail.

At issue in the case is computer flash memory. Flash memory is developed by licensors of flash technology (such as SanDisk). Device manufacturers make the flash memory chips. “Aggregators” purchase component parts and assemble usable products. Finally, resellers purchase finished products for resale. SanDisk is vertically integrated, and both owns an extensive patent portfolio and produces its own branded consumer products.

PNY, an aggregator, challenged SanDisk’s licensing and royalty practices. It alleged that SanDisk used the specter of expensive and endless patent infringement litigation to coerce competitors into signing (under the guise of a settlement) its uniform, non-negotiable license, “which gives SanDisk control over the pricing of flash memory technology and products sold to its competitors and, ultimately, to consumers.” Specifically, PNY alleged that SanDisk required licensees to:

  1. Pay multiple royalties on the same product as it is sold downstream through the distribution chain;
  2. Pay a royalty on worldwide sales (including in countries where SanDisk does not have any patent rights);
  3. License an omnibus patent portfolio, rather than specific individual patents; and
  4. Grant back to SanDisk a worldwide, royalty-free cross-license to future flash memory-related technological innovations within the scope of the portfolio.

The court accepted that PNY had adequately alleged monopoly power and barriers to entry in the upstream market for flash memory technology. However, as to the downstream markets for flash memory devices, systems, and products, PNY failed to allege monopoly power. Its allegation that SanDisk uses licenses to extract a royalty on the same patented technology on all downstream market sales did not establish that SanDisk has the power to control downstream prices, so PNY had not directly alleged market power. Nor did PNY adequately allege that SanDisk had the power to exclude downstream competitors.

As to indirect proof of market power, PNY alleged a 40% share of retail sales of flash memory products, but did not allege SanDisk’s market shares in other downstream markets. This left PNY with, at most, an attempted monopolization claim of the retail market. However, because it did not allege barriers to entry and expansion in the retail market (as opposed to the technology market), it had no retail market attempt claim, either.

Finally, the court also found that PNY had not alleged anticompetitive conduct. As to the technology market, where SanDisk owns patents, the complaint did not allege any willful acquisition of a monopoly. As to the other downstream markets, the complaint did not clearly allege the collection of “double royalties” outside the patent exhaustion doctrine, but rather suggested SanDisk was enforcing its patent rights by collecting a separate royalty for separate sets of patent rights. The complaint also did not adequately allege that the grantback provision was anticompetitive, because PNY did not allege that the provision actually has stifled innovation. And as to the licensed patent portfolio, “[t]he fact that PNY entered into a form license over which SanDisk was able to negotiate more favorable terms does not constitute anticompetitive conduct for antitrust purposes.”

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About Howard Ullman

Antitrust, competition, and IP law enthusiast.

Trackbacks

  1. […] In PNY Technologies, Inc. v. SanDisk Corp., Case No. C-11-04689 (N.D. Cal. Apr. 25, 2014) (Orrick, J.), the court dismissed PNY’s exclusive dealing and attempted monopolization claims. I previously covered the case here. […]

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