Distribution, Competition, and Antitrust / Intellectual Property (IP) Law

“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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Can An “Anti-Patent Troll” Be a Monopsonist or a Section 1 Conspirator?

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(Photo credit: Wikipedia)

A recent interesting case suggests that “anti-patent trolls” may in theory face antitrust liability. In Cascades Computer Innovation LLC v. RPX Corp., 2013 U.S. Dist. LEXIS 10526 (N.D. Cal. Jan. 24, 2013), Judge Yvonne Gonzalez Rogers dismissed – with leave to amend – Cascades’ antitrust complaint against RPX, Dell, HTC, LG Electronics, Motorola Mobility, and Samsung.

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 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.

The court also agreed that Cascades had not adequately pled a conspiracy that made economic sense. According to RPX, a more plausible explanation for the manufacturing defendants’ decision to decline a $5 million licensing offer was that the offer price was too high. RPX had been negotiating a $10 million deal for all of its 110 members, which made a $5 million offer to each of LG, Motorola, Samsung and HTC too high (collectively $20 million). Although the court did not endorse this and several other “economic sense” arguments, it concluded that Cascades

ha[d] fastidiously avoided providing specific facts with respect to the timing of the alleged negotiations and the interplay with the filing of [actions] for patent infringement. Cascades also will need to provide specific facts to clarify why, absent a conspiracy, it is economically irrational for the Manufacturing Defendants—who are being sued by Cascades for infringement of one patent, the ‘750 Patent—to decline an offer to license Cascades’ entire portfolio of 38 patents. Without clarification and specificity, the Court will not presume economic [ir]rationality where the circumstances giving rise to the lawsuit plausibly suggest nothing more than a tactical ploy to regain economic leverage that Plaintiff lost in the licensing negotiations.

However, the court also refused to hold that the alleged group boycott activity could not constitute a per se Section 1 violation. And the court rejected defendants’ argument that Cascades failed to allege antitrust injury because of the lack of allegations regarding possible consumer injury. “Anticompetitive conduct need not harm consumers specifically in order to cause antitrust injury.”

Although Cascades now has an uphill battle, given leave to amend the complaint, only time will tell whether it can allege sufficient facts to establish its conspiracy, competitive harm, and relevant market allegations.

As Professor Hovenkamp cogently wrote in a comment to the article below — a comment which still applies to the likely amended complaint:

As a matter of antitrust law, a great deal will depend on whether this is a naked agreement to refuse to license (or to suppress the price), or whether it is an ancillary agreement setting standards so as to exclude the plaintiff. A naked agreement among a group of competing manufacturers not to purchase a license or to pay only a low fee would be illegal per se under the antitrust laws. On the other hand, joint licensees who are actively engaged in standard setting do set standards that exclude some technologies. Standard setting is addressed under the rule of reason and generally upheld if there is an objectively reasonable basis for the exclusion. An objectively reasonable basis could include a decision that a patent offered by an outsider is not valid or that the manufactures already have suitable alternatives to the offered patent or are not infringing it.

Another possibility is that the defendant device manufacturers are not acting in concert at all, but are individually deciding not to purchase a license from the plaintiff. The firms are not monopolists, and in any event there is no law in the United States that requires even a monopolist (acting unilaterally) to purchase a license from an outside patentee.

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Under Agency Law, Standard Setting Organizations May Be Liable for Antitrust Violations of Their Members

As noted in this recent blog post, in TruePosition, Inc. v. LM Ericsson Telephone Co., No. 11-4574 (E.D. Pa. Oct. 4, 2012), the court held that a Standard Setting Organization (SSO) known as 3GPP may be liable for alleged Sherman Act Section 1 antitrust claims involving the wrongful actions of persons who acted on behalf of the SSO, even when those persons are representatives of the SSO’s corporate members.  (Hat tip to this LinkedIn posting which informed me about the blog post.)

The case involves allegations that defendants conspired to exclude plaintiff’s technology from industry standards (for Long Term Evolution, or LTE, telephone technology).  The SSO argued that the plaintiff’s claims were insufficient because the plaintiff’s theory of liability was one of “acquiescence.”  The SSO characterized the plaintiff’s claims as alleging that the SSO was on notice of the corporate defendants’ alleged misconduct but that the SSO failed to remedy it.  This “inaction,” according to the SSO, did not show the requisite agreement necessary to support a Sherman Act Section 1 claim.

Applying American Society of Mechanical Engineers, Inc. v. Hydrolevel Corp., 456 U.S. 556 (1982), the district court rejected the SSO’s acquiescence argument. 

“As Chairmen of the pertinent 3GPP subcommittees, the Corporate Defendants were agents of 3GPP acting on behalf of 3GPP, even when their actions violated 3GPP’s rules and regulations . . . .  As the facts are set forth in the Amended Complaint, and granting all reasonable inferences to TruePosition, 3GPP is charged with acting through agents whom it has imbued with apparent authority.  Such alleged action involved concerted action.  This is not a case involving mere membership in a standard-setting organiztion . . . .  It is the Corporate Defendants’ alleged unlawful conspiratorial conduct taken with 3GPP’s apparent authority as Chairmen of the relevant committees that makes 3GPP potentially liable for their actions. Under the facts presented in the Amended Complaint, 3GPP cannot consider itself as separate and distinct from the actions of the Corporate Defendants when they were acting with 3GPP’s apparent authority.”

The court also determined that the complaint adequately alleged minimally sufficient facts to plausibly suggest that 3GPP assented to the alleged conspiracy through the corporate defendants’ actions taken with the apparent authority of 3GPP holding leadership positions within its committees.  “This is not a case where most of the alleged unlawful activities were conducted by the Corporate Defendants outside the confines of 3GPP but, rather, the majority of the allegations specifically involve the actions of the Corporate Defendants as Chairmen of 3GPP’s committees thwarting and using its standardization process to disadvantage a competitor.”

The case is a useful reminder that an SSO has potential antitrust exposure for the activities of its members when the members act under color of authority of the SSO.

Court Approves DOJ Antitrust Settlement with Three E-Book Publishers

Last week the Southern District of New York approved the DOJ’s settlement with Hachette Book Group Inc., HarperCollins Publishers LLC, and Simon & Schuster, Inc. (I previously covered the Apple e-book case here and here.)

Under the Tunney Act, consent settlements with the DOJ are subject to court review and public comment. The three e-book publishers reached a settlement with the DOJ before the Department filed its antitrust suit.

Under the settlement agreements, the publishers must end their e-book agency agreements with Apple within seven days of final judgment. They must also end any contracts with other e-book retailers that prevent them from setting their own prices or include most-favored nation (“MFN”) clauses that guarantee that retail competitors are not receiving better terms. Additionally, under the settlements, distribution provisions limiting retailers’ ability to set e-book pricing are banned for several years.

The DOJ has received hundreds of Tunney Act comments about the settlements. Additionally, Apple, Penguin, and others have filed amicus briefs with the court criticizing one or more aspects of the settlements. Bob Kohn, the founder of eMusic, has been a particularly vocal critic. You may have read about his creative five-page cartoon or graphic novel format brief (which he filed due to the court’s page constraints).

Kohn (and perhaps others) have argued that DOJ essentially accused Amazon of price predation, and that the Apple e-book deals were a lawful and appropriate response to such predation.

Apple, Macmillan, and Penguin remain in the DOJ suit.

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What You Need to Know About the Four Basic Types of Pricing Claims (Part 4)

In the last post, we saw that price information exchanges that do not impact pricing are not unlawful. However, we also saw that such exchanges can facilitate collusion and can provide plaintiffs with evidence supporting a price fixing charge.

A comment to the last post asked about how to structure information exchanges to avoid these potential problems.

In their antitrust healthcare guidelines, DOJ and FTC have provided guidance on this issue. Although the guidance comes in the context of the healthcare industry, there is little or no reason to suspect that the guidance would vary according to industry. Note, however, that DOJ/FTC guidelines are not binding on the courts, which may or may not accept them.

With those caveats out of the way, what do DOJ and FTC say about competitors’ collection or provision of price information? According to DOJ and FTC,

“Participation by competing providers in surveys of prices for health care services, or surveys of salaries, wages or benefits of personnel, does not necessarily raise antitrust concerns. In fact, such surveys can have significant benefits for health care consumers. Providers can use information derived from price and compensation surveys to price their services more competitively and to offer compensation that attracts highly qualified personnel. Purchasers can use price survey information to make more informed decisions when buying health care services.”

DOJ and FTC go on to note that without appropriate safeguards, however, information exchanges among competing providers may facilitate collusion or otherwise reduce competition on prices or compensation, resulting in increased prices, or reduced quality and availability of health care services. “A collusive restriction on the compensation paid to health care employees, for example, could adversely affect the availability of health care personnel.”

DOJ and FTC then articulate a “safety zone” for exchanges of price and cost information among providers that they will not challenge, absent extraordinary circumstances. The safety zone applies to a written survey where:

  1. the survey is managed by a third-party (e.g., a purchaser, government agency, health care consultant, academic institution, or trade association);
  2. the information provided by survey participants is based on data more than 3 months old; and
  3. there are at least five providers reporting data upon which each disseminated statistic is based, no individual provider’s data represents more than 25% on a weighted basis of that statistic, and any information disseminated is sufficiently aggregated such that it would not allow recipients to identify the prices charged or compensation paid by any particular provider.

These conditions are designed to prevent the sort of facilitation of collusion discussed in the last post.

Note that a price information exchange that does not meet these criteria is not automatically unlawful; it just does not enjoy the DOJ/FTC safety zone. But there is little reason to design a program that does not meet the safety zone criteria from the outset.

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What You Need to Know About The Four Basic Types of Pricing Claims (Part 3)

This is the third in a series of posts.  The last post can be found here.

Price information exchanges that do not impact pricing.  Such an exchange by itself is probably not subject to private challenge. See, e.g., Blomkest Fertilizer, Inc. v. Potash Corp. of Sask., Inc., 203 F.3d 1028 (8th Cir. 2000) (price verifications only concerned charges on particular completed sales, not future market prices; no evidence supported inference that the verifications had an impact on price increases; the only evidence was that prices were possibly cut as a result; defense summary judgment affirmed).

Note, however, that a price information exchange could be viewed as a “plus factor” that tends to support an inference of an actual price agreement.  Therefore, it is always advisable to consider the antitrust implications of any exchange of price information before engaging in such an exchange.

What You Need to Know About The Four Basic Types of Pricing Claims (Part 2)

This is the second in a series of posts.  The first can be found here.

Price information exchanges that impact pricing.  Such an exchange is not per se illegal. However, it may be unlawful under a rule of reason analysis. See, e.g., United States v. Container Corp. of America, 393 U.S. 333 (1969).

To successfully challenge such an exchange, it is necessary to prove price impact. This can become complicated. For example, if market pricing is instantaneous and entirely transparent, how would one prove that an agreement to exchange price information has impacted prices? Generally, the less transparent the market pricing is, the more opportunity for a price information exchange to work mischief.

The Airline Tariff Publishing Company (ATP) case is informative and illustrates some of the complexities. In December 1992, DOJ sued eight of the largest U.S. airlines and the Airline Tariff Publishing Company (ATP) for price fixing and for operating ATP, their jointly-owned fare exchange system, in a way that facilitated collusion, in violation of §1 of the Sherman Act.

According to the DOJ, ATP was a complex information exchange system among airlines that was widely and openly operated to disseminate fare information through computer reservation systems and travel agents. ATP provided both a means for the airlines to disseminate fare information to the public and a means for them to engage in essentially a private dialogue on fares.

Again, according to the DOJ, the defendants designed and operated ATP’s computerized fare exchange system in a way that unnecessarily facilitated coordinated interaction among them so that they could (1) communicate more effectively with one another about future fare increases, restrictions, and elimination of discounted fares, (2) establish links between proposed fare changes in one or more city-pair markets and proposed changes in other city-pair markets, (3) monitor each other’s changes, including changes in fares not available for sale, and (4) reduce uncertainty about each other’s pricing intentions.

The ATP case involved “cheap talk”– communication that does not commit firms to a course of action — such as announcing a future price increase but leaving open the option to rescind or revise it before it takes effect. If the terms of agreement are complex (e.g., specifying prices in numerous markets) but there is a common desire to reach agreement, cheap talk can help firms reach a collusive equilibrium.

ATP collected fare information from the airlines and distributed it daily to all the airlines and to the major computer reservation systems (CRSs) that serve travel agents. This arrangement was an efficient instrument for cheap talk.

The case was resolved with a consent decree crafted to ensure that the airline defendants did not continue to use any fare dissemination system in a manner that unnecessarily facilitated price coordination or that enable them to reach specific price-fixing agreements.

Note that the final judgment did not prevent the settling defendants from disseminating currently available fares through ATP, from advertising currently available fares to consumers, or from offering for sale fares good only for future travel. Also, the settling defendants remained free to give consumers general information on impending fare changes.

Next post: a price information exchange that does not impact pricing.

What You Need to Know About the Four Basic Types of Pricing Claims (Part 1)

To every even casual reader of this blog, it is obvious that antitrust and competition law apply to the pricing behavior of competing firms. But what exactly are the danger zones, and what sorts of claims can be brought? In the next few posts, I will provide some basic information about pricing issues and claims. I will focus on horizontal pricing issues (i.e., pricing between and among “horizontally” situated firms which compete with each other).

We can consider four basic types of claims: (i) an actual price-fixing claim, (ii) a claim for a price information exchange that impacts pricing, (iii) a claim regarding a price information exchange that does not impact pricing, and (iv) a claim for parallel pricing behavior. This discussion focuses on the federal Sherman Act, but the California Cartwright Act (and many other states’ laws) is largely similar.

An actual price-fixing claim. This type of claim requires allegation and proof of an actual agreement to fix or set prices. An agreement need not be formal and written; it can be oral and informal. A “wink and a nod” are enough. But there needs to be a meeting of the minds. If competitors enter into such an agreement, it is per se illegal. Pro-competitive justifications, lack of impact, etc. are irrelevant. (Though to get damages in a private suit, you still need to prove damages.)

An agreement can be proven up directly or through circumstantial evidence. If proven circumstantially, the evidence must essentially exclude the possibility that the defendants’ actions are as consistent with independent action as they are with conspiracy. This is the Matsushita summary judgment rule.

Evidence of a price information exchange (next post) can tend to support the inference of a price-fixing agreement, because price information exchange can help defendants to implement, monitor, and enforce a price-fixing agreement. But price information exchange alone does not prove a price-fixing agreement. It is one of several “plus factors” that can help move permissible parallel pricing over the line into the zone of impermissible agreement.

Compare In re Coordinated Pretrial Proceedings in Petroleum Products Antitrust Litigation, 906 F.2d 432 (9th Cir. 1990) (evidence of parallel pricing in a relatively concentrated market, plus evidence that defendants publicly announced, in press releases, their advance pricing decisions, in order to facilitate either interdependent or plainly collusive price coordination, is sufficient to survive a defense motion for summary judgment on a price-fixing claim) with Reserve Supply Corp. v. Owens-Corning Fiberglas Corp., 971 F.2d 37 (7th Cir. 1992) (defendants’ practices of maintaining price lists for products and of announcing price increases 30 to 60 days before their effective date did not amount to an improper information exchange; discounts were widely used in the industry, making the price lists a poor candidate to coordinate pricing; publicly pre-announcing price increases served a legitimate purpose because customers, who were mostly rehandlers and contractors, needed to be able to inform their customers of price increases or to figure such increases into their bidding).

Next post: price information exchanges that impact pricing.

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Private Standard-Setting Efforts Pose Antitrust Risks

English: Stateic Ram chip form a NES clone. 2K...

SRAM (Photo credit: Wikipedia)

By “private” standard-setting, I’m referring to agreements between or among competitors outside the context of a Standard-Setting Organization (“SSO”) open to the industry and governed by (at least relatively transparent) rules.

Such agreements carry antitrust risks, as illustrated by the recent case of GSI Technology, Inc. v. Cypress Semiconductor Corp., Case No. 5:11-cv-03613 EJD (N.D. Cal. July 6, 2012) (Davila, J).

GSI, a competitor of Cypress in the field of development and manufacture of static random access memory (“SRAM”), alleged that Cypress and other competitors agreed to share information for the development of new “networking” SRAM products. The alleged “consortium” used its agreement to exclude GSI and others from participation in development of product standards intended to serve the market, and allegedly injured their ability to enter the market in a timely manner and to compete effectively for customers. Delayed market entry — even by just a few months — allegedly enable the consortium to lock in the market’s relatively few purchasers, including Cisco.

The court held that the complaint sufficiently alleged, among other things, a Sherman Act Section 1 (unreasonable restraint of trade) violation.

Now, not every non-price agreement between competitors will survive a motion to dismiss. However, in the GSI case, the plaintiff alleged that the consortium supplied 2/3 of the “fast” SRAM worldwide, and that the goal of the consortium was monopolization. The defendant allegedly was the largest networking SRAM supplier in 2010. Given these allegations, the court concluded that the complaint sufficiently alleged that the defendant had market power.

I express no opinion on the facts of the case. However, the decision refusing to dismiss the complaint nicely illustrates the dangers inherent in competitor collaborations — especially those that are not open to the industry.  Any such collaboration should be evaluated for antitrust risk, especially where the firms have substantial market shares.

(Open SSOs pose their own share of antitrust issues, however. See the related article below, for example.)

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Explanation of the Alleged LIBOR Manipulation Scheme

Good background on the alleged scheme to manipulate LIBOR.  Via NPR’s Planet Money program, again.  About halfway through, the program discusses allegations of interbank agreements to manipulate reported LIBOR rates.  (It’s NPR show #384 on the page that opens if you click the link.)

But does an interbank LIBOR conspiracy even make sense?  Below in the link from economicpolicyjournal.com there’s an argument that the scandal is really a tempest in a teapot, because the banks can’t set the interest rates:

Interest rates are market prices. If banks got together and claimed to be paying less than they were, which resulted in lower rates overall, this would result in a situation where the demand for loans would be greater than the supply. If banks claimed they were paying more than they were, then the demand for loans would be less than the supply.

Well, perhaps . . .  But — and without knowing anything about the actual facts of what has transpired here — it seems to me that there might nevertheless, purely as a matter of economic theory, be short-term opportunities for agreements to adjust or affect the reported LIBOR rates.  Although the economicpolicyjournal.com article argues that those opportunities are “infinitesimal,” it would be interesting to see some actual data or analysis.  They may back up the article’s intuition.

P.S. — the rather archaic way in which LIBOR is actually calculated — covered in the NPR story — is really quite fascinating.

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