Distribution, Competition, and Antitrust / IP Law

Archives for 2013

Happy New Year

Happy New Year

(Photo credit: James Marvin Phelps)

Happy holidays and best wishes for the New Year.  Blogging will resume after the 1st.

 

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“Anti-Patent Troll” Fails to Secure Dismissal of Amended Antitrust Complaint

 

No-Troll

No-Troll (Photo credit: Wikipedia)

Back in January, I covered the case of Cascades Computer Innovation LLC v. RPX Corp., 2013 U.S. Dist. LEXIS 10526 (N.D. Cal. Jan. 24, 2013), where Judge Yvonne Gonzalez Rogers dismissed – with leave to amend – Cascades’ antitrust complaint against RPX, Dell, HTC, LG Electronics, Motorola Mobility, and Samsung. On December 3, 2013, Judge Rogers refused to dismiss Cascades’ amended complaint. See 2013 U.S. Dist. LEXIS 170517.

Cascades is a non-practicing entity (“NPE”), accused by the defendants of being a “patent troll.” It holds the rights to a portfolio of patents relating to technology that optimizes the use of the Android mobile phone/tablet operating system. Dell, HTC, LG, Motorola Mobility, and Samsung (the manufacturing defendants) sell mobile devices, including those employing the Android operating system. Together, they allegedly sell more than 95% of all Android devices in the United States.

Cascades alleged that the manufacturing defendants, along with RPX, engaged in a group boycott to not license Cascades’ patents. RPX is a defensive patent aggregator – an “anti-troll” – formed to protect its members from NPEs. It frequently acts as an intermediary for its members for purposes of acquiring patents and negotiating licenses on behalf of its members.

In a nutshell, Cascades alleged that the manufacturing defendants, through or with RPX, refused to negotiate separately with Cascades for patent licenses, or at least refused to negotiate independently in a “serious” manner with Cascades, and that the defendants agreed not to license Cascades’ patents. Allegedly, the object of the conspiracy was to force Cascades to abandon its efforts to license and enforce its patents, accept a below market-value offer from RPX, or go out of business by virtue of expensive litigation. In this manner, defendants would allegedly obtain a monopsony position.

In granting defendants’ motions to dismiss the original complaint, the Northern District of California agreed that Cascades had not adequately alleged a conspiracy, had not properly defined a relevant market, and had not adequately alleged harm to competition. In its amended complaint,(*) Cascades provided much greater detail about the negotiation history with RPX. Those alleged facts were sufficient for the Court to conclude that Cascades had adequately alleged both a horizontal conspiracy – an agreement among manufacturers not to deal with Cascades except through RPX – and a vertical conspiracy, i.e., an agreement between each manufacturing defendant and RPX. “[W]hile the [amended complaint] alleges a written agreement between RPX and each Manufacturing Defendant which permits individual negotiation, it also suggests that in this instance each Manufacturing Defendant understood that it should refrain from exercising its right to negotiate individually with Cascades and instead deal with Cascades either through RPX or not at all.”

The Court also rejected various other arguments advanced by the defendants, including the argument that defendants did not want to deal with Cascades individually because Cascades had overpriced its patents. While that theory was “plausib[le],” the Court did “not find it so fully and convincingly explanatory as to render Cascades’ revised allegations implausible by comparison.” The Court also determined that the conspiracy alleged by Cascades “makes economic sense because it would permit potential licensees . . . to realize RPX’s publically stated promise of ‘wholesale’ pricing, provided they refrained from competitively bidding against each other and sent RPX to the market in their stead, where it would be the sole viable purchaser.”

Cascades raises novel issues involving the application of antitrust law to the activities of defensive patent aggregators. It will be interesting to see how the case develops after discovery is completed.

(*) Cascades voluntarily dismissed its claims against LG and did not name Dell as a defendant in its amended complaint.

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Trademark Misuse Is ^Almost^ Never an Antitrust Injury

Trademarks are commonly thought to convey no market power. In RJ Machine Co. v. Canada Pipeline Accessories Co., Case No. 1:13-cv-00579-SS (W.D. Tex. Nov. 22, 2013) (Sparks, J.), the court dismissed antitrust claims predicated upon alleged trademark misuse – but interestingly left the door (slightly) open to future claims based on similar conduct.

The case involves flow conditioners in oil pipelines. The defendant had a patent on a type of flow conditioner which expired in 2011. The defendant also obtained a trademark registration for the terms “50E” and “CPA-50E” for certain flow conditioners. Additionally, the defendant allegedly claims the design of its 50E flow conditioner comprises non-functional, distinctive, and protectable trade dress.

The plaintiff (a potential market entrant) claimed that the defendant threatened to sue if the plaintiff advertised or marketed a flow conditioner using the design taught in the expired patent or used the term “50E” to identify its flow conditioner, and brought antitrust and other claims. The court dismissed the antitrust claims because the defendant was allegedly enforcing registered trademarks, and the exercise and enforcement of those marks could not be a “sham” or in “bad faith” under a Noerr-Pennington type analysis.

However, the court did not entirely agree with the defendant that enforcement of trademarks and claimed trade dress can never be considered an antitrust injury because the plaintiff “in order to escape the clutches of an alleged trademark monopoly” can just market its product under a different name. The court noted that

RJ Machine contends the term “50E”, based on the history and development of the market for this product, is the only term consumers associate with this flow conditioner. In addition, according to RJ Machine’s allegations, Canada Pipeline has been able to “lock in” consumers of 50E conditioners because they can only be replaced by flow conditioners with the same 50E design. The anticompetitive argument is even more persuasive when it comes to trade dress. If the 50E design is as functional as RJ Machine alleges, it would be difficult, if not impossible, for RJ Machine to compete in the flow conditioner market without using the same functional design Canada Pipeline is claiming to be its trade dress.

The decision thus leaves open the theoretical possibility that in certain unusual situations, trademark assertion or misuse could lead to antitrust injury.

Injunctive Relief, but not Damages Class, Certified in NCAA Student-Athlete Litigation

English: National Collegiate Athletic Associat...

(Photo credit: Wikipedia)

In In re NCAA Student-Athlete Name & Likeness Licensing Litigation, 2013 U.S. Dist. LEXIS 160739 (N.D. Cal. Nov. 8, 2013) (Wilken, J.)., the Court certified a class of current and former student-athletes seeking injunctive relief, but declined to certify a damages class. The case illustrates the importance for plaintiffs of tying a theory of harm to damages to all purported class members – or for defendants, the importance of finding a disconnect between the two.

The plaintiffs were or are NCAA Division I football and basketball student-athletes. They allege that the NCAA misappropriated their names, images, and likenesses in violation of their statutory and common law rights of publicity. Some of the named plaintiffs also allege that the NCAA violated federal antitrust law by conspiring with Electronic Arts and the marketing firm Collegiate Licensing Company to restraint competition in the market for the commercial use of their names, images, and likenesses.

Plaintiffs allege a market for the acquisition of group licensing rights for the use of names, images and likenesses in the broadcasts or rebroadcasts of Division I basketball and football games and in videogames featuring Division I basketball and football. Plaintiffs challenge the NCAA’s rules, which allegedly prohibit student-athletes from receiving compensation for the commercial use of their names, images, and likenesses. Plaintiffs also seek monetary damages as a result of the NCAA’s alleged plan to fix at zero the price of student-athletes’ group licensing rights.

The Northern District of California had little difficulty in certifying a class of plaintiffs seeking injunctive relief against the NCAA. However, the Court declined to certify a Rule 23(b)(3) damages subclass, for several reasons.

First, in the Court’s view, the Plaintiffs had failed to satisfy the manageability requirement because they did not identify a feasible way to determine which members of the damages subclass were actually harmed by the NCAA’s allegedly anticompetitive conduct. In the Court’s view, the Plaintiffs did not address or overcome the “substitution effect” – i.e., the fact that if athletes had stayed in college because the NCAA’s rules were different, they would have displaced other student-athletes on their respective teams. Those displaced student-athletes would have either been forced to play for other Division I teams or simply lost the opportunity to play in Division I altogether. In either case, they would not have suffered injuries as members of the teams for which they actually played.

Second, the Court concluded that Plaintiffs had not adequately proposed a method to determine which student-athletes were actually depicted in videogames during the relevant class period, or which student-athletes appeared in game footage during the relevant time period.

These sorts of substitution effects occur with some frequency, and require careful attention.

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Speaking on Antitrust Issues in Intellectual Property Licensing Transactions

FYI, I will be speaking on “Antitrust Issues in Intellectual Property Licensing Transactions” on November 6, 2013 at 1:00 P.M. Eastern Time.  Here is a link to the webinar program.  I will be covering the Nine “No-Nos” of antitrust/intellectual property licensing, which I’ve written about previously in this blog.

Is the California Unfair Practices Act a Free Pass on Motions to Dismiss?

Probably not, but UPA claims can be tough to defeat at the motion to dismiss stage. Witness Rheumatology Diagnostics Laboratory, Inc. v. Aetna, Inc., 2013 U.S. Dist. LEXIS 151128 (N.D. Cal. Oct. 18, 2013) (Orrick, J.), where the court dismissed many of the plaintiffs’ Sherman Act Section 1 and Section 2 claims. However, the court refused to dismiss the plaintiffs’ below-cost pricing claims against Quest Diagnostics under the UPA, reasoning:

The UPA “appears to be a painstaking endeavor by the legislature to combat the abuses which the business interests have deemed unfair practices in the competitive field.” To require the plaintiffs to plead with an unreasonable degree of specificity would undermine the UPA’s admonition that the statute “shall be liberally construed that its beneficial purposes may be subserved.” Cal. Bus. & Prof. Code § 17002. Much of the information that must be pleaded—Quest’s costs and the prices it charges by product—is in Quest’s hands and not easily accessed by the plaintiffs. The Court does not “forget that proceeding to [ ] discovery can be expensive” or that the plaintiffs must meet their burden under Federal Rule of Civil Procedure 8. However, even in a case where the plaintiff “fail[ed] to allege a definite cost of doing business,” the California Court of Appeal held that “it would serve no useful purpose to require a speculative allegation of cost which adds nothing to the notice given by the pleadings in their present state. Accordingly, we view the present pleadings as sufficient under section 17043 and find error in sustaining the demurrer thereto.”

In sum, “the determination of cost is best approached on a case-by-case basis.” So long as the method used was not “arbitrary or irrational,” it is sufficient for pleading purposes. Finding that the plaintiffs adequately plead their UPA claim based on the information alleged in the [complaint] does not mean that the information or calculations provided are necessarily correct or even that the plaintiffs are likely to succeed in proving their claim. Quest may dispute the details of the calculation method later to the trier of fact. However, the purpose of pleading is to put a defendant on sufficient notice of its alleged wrongdoing, and the plaintiffs have done so here.

(Citations omitted). This liberal standard – coupled with the fact that a UPA plaintiff probably need not prove a dangerous probability of recoupment after the predatory period, a requirement under federal law – makes it difficult to target these claims on a motion to dismiss.

A Useful Reminder About Sham Litigation as Exclusionary Conduct

In Surface Supplied, Inc. v. Kirby Morgan Dive Systems, Inc., 2013 U.S. Dist. LEXIS 143478 (N.D. Cal. Oct. 3, 2013) (Chesney, J.), the Court dismissed attempted monopolization and monopolization counterclaims with leave to amend. The Court found a number of defects in the claims, which were grounded in allegations that Kirby had filed anticompetitive litigation.

The Court drew a sharp line between two types of sham litigation claims. If the alleged anticompetitive behavior consists of bringing a single sham lawsuit (or a small number of such suits), the antitrust plaintiff must demonstrate that the lawsuit was (1) objectively baseless and (2) a concealed attempt to interfere with the plaintiff’s business relationships. Kottle v. Nw. Kidney Centers, 146 F.3d 1056, 1060 (9th Cir. 1988). On the other hand, if the alleged anticompetitive behavior is the filing of a series of lawsuits, the question becomes not whether any one of them has merit – some may turn out to, just as a matter of chance – but whether they are brought pursuant to a policy of starting legal proceedings without regard to the merits and for the purpose of injuring a market rival. See id.

SSI alleged a “pattern and practice” of filing a series of lawsuits, but identified only two. Therefore, the Court held, it had not alleged a series-type sham litigation claim. But if SSI intended to rest its claim on anticompetitive behavior from the two lawsuits it expressly referenced, it failed to plead any facts showing those lawsuits to be objectively baseless. “In sum, SSI fails to adequately plead the first element of a claim for attempt to monopolize.”  (The monopolization claim failed for the same reason.)

In short, “sham” litigation claims require appropriate factual support – conclusory, naked allegations are often insufficient.

Allegations of Harm to Competition Caused by Multiple Defendants Can’t be Aggregated

English: Logo for The Home Depot. Category:Bra...

(Photo credit: Wikipedia)

Earlier this year, I covered the case of Orchard Supply Hardware LLC v. Home Depot USA, Inc. See this post.

On September 19, 2013, the court (the Northern District of California) issued its decision on defendants’ motion to dismiss the plaintiff’s second amended complaint. The court dismissed plaintiff’s antitrust claims against the tool manufacturers (Makita and Milwaukee Electric Tool Corp. (“METCo”)), this time with prejudice.

On its second go-round, the court found that Orchard had alleged harm to competition, because it alleged a distinct product submarket: the market for certain specific professional power tools, as purchased by professional customers. “The market Orchard alleges . . . is defined by a distinct set of products, and within that market Orchard alleges that there is a distinct submarket as indicated by a distinct set of purchasers, sensitive to a distinct price point. Within this submarket, Orchard alleges that the challenged agreements have the effective of totally foreclosing competition. These allegations suffice to outline a defined submarket in which Orchard has pled harm to competition.”

The court rejected defendants’ argument that Orchard had failed to allege harm to competition because it had alleged neither a reduction in the output or quality of goods, and had not demonstrated an increase in price caused by Orchard’s foreclosure from the market. “An antitrust plaintiff need not demonstrate that prices have actually been raised to plead a rule-of-reason claim.”

Nevertheless, the court dismissed the claims against Makita and METCo. Plaintiff alleged that each tool manufacturer had entered into a separate vertical, exclusive agreement with Home Depot. “[I]t is inappropriate to aggregate the two vertical agreements in evaluating whether METCo and Makita’s conduct was anti-competitive. METCo and Makita each separately made an agreement with Home Depot. Orchard does not contend that, taken individually, these contracts have an anticompetitive effect . . . . If an individual supplier could be held liable for the cumulative impact of all suppliers’ conduct, a company would have to investigate what other businesses were doing before it acted in order to make sure its own conduct wasn’t anticompetitive, a burden the antitrust law does not impose.”

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If Your Allegations Don’t Establish a Price Effect, You May Lack Antitrust Standing

ipod shuffle loja online leilao

ipod shuffle (Photo credit: sucelloleiloes)

In Somers v. Apple, Inc., Case No. 11-16896 (9th Cir. Sept. 3, 2013), the Ninth Circuit affirmed the district court’s dismissal of a putative class action against Apple, Inc., alleging antitrust violations in connection with Apple’s iPod and its Tunes Music Store.  The case illustrates the dangers of failing to adequately allege a price effect caused by a defendant’s purportedly anticompetitive conduct.

On behalf of a putative class, Somers alleges that she suffered injury in the form of inflated music prices. The premise of her overcharge theory is that Apple used software updates to thwart competitors (e.g., Real Networks) and gain a monopoly in the music download market, which permitted Apple to charge higher prices for its music than it could have in a competitive market. Specifically, Somers alleges that if Apple had not engaged in anti-competitive conduct to exclude Real Networks from the market, “it would have had to price Audio Downloads to compete on price with Real Networks.”

(Slip Opinion at 19-20.)

But, unfortunately for Somers, her allegations did not square with her overcharge theory.  Apple’s price for music downloads remained stable before the time it allegedly acquired a monopoly and afterwards.

Moreover,

if Somers’ overcharge theory were correct, then Apple’s music prices from 2004 to 2008 were supracompetitive as a result of software updates that excluded competition, and the emergence of a large seller such as Amazon would have caused iTS [iTunes] music prices to fall. But Somers alleges no such price reduction. Somers’ overcharge theory is thus implausible in the face of contradictory market facts alleged in her complaint. As Somers herself acknowledges, under basic economic principles, increased competition—as Apple encountered in 2008 with the entrance of Amazon—generally lowers prices.

(Id. at 20.)  “The fact that Apple continuously charged the same price for its music irrespective of the absence or presence of a competitor renders implausible Somers’ conclusory assertion that Apple’s software updates affected music prices.”  (Id. at 21.)

The Ninth Circuit agreed that price “is only one possible indicator in assessing competitive markets.  Monopoly power may be evaluated by other factors, such as barriers to entry or structural evidence of a monopolized market.”  (Id. at 21.)  “But if Apple did not charge inflated prices for its music, then this fact contradicts Somers’ overcharge theory, and there would be no basis for damages in the first place.”  (Id.)

While Somers suggested that it was conceivable that Apple’s music was not priced higher because of some other factor, such as superior product or greater efficiency, the court found that to state a plausible antitrust injury, a plaintiff must allege facts that rise beyond mere conceivability or possibility.  “We are only left to speculate on what factors could have permitted Apple to charge 99 cents continuously.”  (Id. at 22.)  Somers therefore failed to plead a plausible, non-speculative claim.

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Market Clearing in the Legal Education Market

According to the Law School Admission Council, the following data represent ABA applicants and applications for each of the past three falls:

three-year-aba1

three-year-aba2

The LSAC reports that “[a]s of 08/08/13, there are 385,358 Fall 2013 applications submitted by 59,426 applicants. Applicants are down 12.3% and applications are down 17.9% from 2012.” 

It’s surprising that the figures haven’t gone down further.  That’s probably due to various market imperfections, including incomplete information available to applicants about market conditions.

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