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

January 28, 2013 by Leave a Comment
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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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Filed Under: Horizontal Restraints, Monopolization, Northern District of California, Patents, Refusal to Deal Tagged With: , , , ,

Private Standard-Setting Efforts Pose Antitrust Risks

July 11, 2012 by Leave a Comment
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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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Filed Under: Horizontal Restraints, Northern District of California, Trade Associations Tagged With: , ,

Litigation Costs Are Monopolization Damages

July 3, 2012 by Leave a Comment

In the ongoing Apple v. Samsung war, on June 30, 2012, Judge Lucy H. Koh of the Northern District of California denied Samsung’s bid for summary judgment on the basis that Apple had failed to offer any evidence of antitrust damages. 

(Apple alleges that Samsung violated a Fair, Reasonable and Non-Discriminatory (“FRAND”) obligation to license patents to a standard-setting organization and its members.  See the first related article link below.)

The court held that litigation expenses stemming directly from Samsung’s alleged anticompetitive behavior are recoverable as antitrust damages.  It also held that Apple’s limited amount of factual (non-expert) evidence of litigation expenses was sufficient to avoid summary judgment.

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Filed Under: Apple, Monopolization, Northern District of California, Patents Tagged With: , , ,

eBay and PayPal Can’t Cut Tying Claims

June 5, 2012 by Leave a Comment

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In Smith v. eBay Corp., No. C 10-03825 JSW (N.D. Cal. May 29, 2012) (White, J.), the court refused to dismiss tying claims against eBay and PayPal where the plaintiffs alleged that eBay had tied national on-line auction services to the national on-line payment services provided by PayPal.

Distinguishing the Ninth Circuit’s recent cable TV channel tying case, Brantley v. Universal, Inc. 675 F.3d 1193 (9th Cir. 2012), which I covered here, the court noted that plaintiffs had alleged that defendants’ tying of auction services to on-line payment services had denied alternative payment systems such as Google Checkout access to the largest online marketplace (eBay).  Plaintiffs thus alleged, in essence, that they had been precluded from offering Google Checkout as an alternative to PayPal.  ”It is reasonable to assume from these allegations that the alleged tying arrangement caused consumers of on-line auction services to forego substitutes for PayPal.”

The plaintiffs in Brantleywere tripped up because they didn’t allege (and apparently couldn’t allege) that independent TV networks had been foreclosed by the tying/bundling practices at issue in that case.  The competitor foreclosure allegations in Smith v. eBay, while thin, were apparently enough to avoid a similar result.

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Filed Under: Northern District of California, Tying Tagged With: ,

Northern District of California Reiterates That You Can Monopolize a Technology Market

May 17, 2012 by 3 Comments

Not every antitrust market is a physical product market.

In Apple, Inc. v. Samsung Electronics Co., Ltd., Case No. 11-CV-01846 (N.D. Cal. May 14, 2012) (Koh, J.), a patent case, the court refused to dismiss Apple’s counterclaims, including a Sherman Act § 2 counterclaim, against Samsung arising out of Samsung’s alleged manipulation of the mobile phone standard-setting process (which alleged resulted in the industry being “locked in” to technology owned and controlled by Samsung). The decision features three holdings of note:

  1. The court rejected Samsung’s argument that Apple had not pled a relevant antitrust market because it alleged monopolization of a technology market, and not a physical product market. Samsung’s argument that only physical product markets are cognizable was novel, but many courts have accepted technology markets as relevant markets. As have the DOJ and the FTC.
  2. The court also rejected Samsung’s argument that Apple had not adequately alleged market or monopoly power. Under Illinois Tool Works, of course, patents do not establish market power. But where a patent is incorporated into an industry standard, and where the standardization of the patented technology prevented the development of other proprietary technologies, the entity that caused the Standard Setting Organization (“SSO”) to adopt its technology may have market power, the court held.
  3. Finally, the court reiterated that an SSO can be used to obtain monopoly power and create anticompetitive effects on the relevant markets.  That can occur in a consensus-oriented private standard-setting environment, when a patent holder’s intentionally false promises to license essential proprietary technology on FRAND (fair, reasonable, and non-discriminatory) terms is coupled with the SSO’s reliance on that promise when including the technology in a standard, and the patent holder subsequently breaches that promise. Allegations of false FRAND commitments are subject to Federal Rule of Civil Procedure 9(b)’s heightened pleading standard, which Apple met.

Moral of the story: a robust and properly-framed SSO manipulation complaint can be difficult (though not impossible) to dismiss.

Filed Under: Apple, Monopolization, Northern District of California, Patents, Technology Markets Tagged With: , , , ,

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

April 25, 2012 by Leave a Comment

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.”

Filed Under: Licensing, Monopolization, Northern District of California, Patents Tagged With: , , ,

Northern District of California Antitrust Roundup

April 24, 2012 by Leave a Comment

The Roundup

There have been several notable developments in the past few days in antitrust cases in the Northern District of California. I’ll summarize them briefly here.

In In re High-Tech Employee Antitrust Litigation, Case No. 11-CV-02509-LHK, 2012 U.S. Dist. LEXIS 55302 (N.D. Cal. Apr. 18, 2012) (Koh, J.), the court granted in part and denied in part a motion to dismiss in the private case alleging a conspiracy to fix and suppress employee compensation and to restrict employee mobility among high-tech companies. According to plaintiffs, the conspiracy consisted of an interconnected web of express bilateral agreements, each with the active involvement and participation of a company under the control of the late Steve Jobs and/or a company whose board shared at least one member of Apple’s board of directors. From 2005 to 2007, each pair of defendants in a bilateral agreement allegedly entered into nearly identical “Do Not Cold Call” agreements, whereby each company allegedly placed the names of the other company’s employees on a “Do Not Cold Call” list and instructed recruiters not to cold call the employees of the other company.

In its order, the court rejected Defendants’ argument that the plaintiffs had not pled the “who, what, where and when” of an alleged overarching conspiracy. “Plaintiffs here have alleged much more than mere parallel conduct, despite not having any discovery before filing . . . . Plaintiffs’ [complaint] details the actors, effect, victims, location, and timing of the six bilateral agreements between Defendants.” The court also determined that the plaintiffs’ conspiracy theory was plausible in light of basic economic principles, despite the fact that many “pairings” of the companies allegedly involved did not feature Do Not Cold Call arrangements. In the court’s view, “it is plausible to infer that even a single bilateral agreement would have the ripple effect of depressing the mobility and compensation of employees of companies that are not direct parties to the agreement. Plaintiffs’ allegations of six parallel bilateral agreements render the inference of an anticompetitive ripple effect that much more plausible.” The court also determined that plaintiffs had alleged antitrust injury.

The court did dismiss the plaintiff’s California Unfair Competition Law (Bus. and Prof. Code § 17200) claim because higher compensation (in absence of the alleged conspiracy) did not support restitution or disgorgement relief under Section 17200.

In In re Optical Disk Drive Antitrust Litigation, Case No. 3:10-md-2143 RS, 2012 U.S. Dist. LEXIS 55300 (N.D. Cal. Apr. 19, 2012) (Seeborg, J.), the court found that an amended conspiracy complaint alleging a “substantially narrower, and more plausible” conspiracy was adequately pled and survived a motion to dismiss. The amended complaint makes clear that the defendants allegedly fixed the prices only of Optical Disc Drives (“ODDs”), and not also products that contain ODDs. (In a prior order, the court had found that allegations that the defendants fixed prices of ODD-containing products was implausible.) The court also determined, among other things, that purchasers of “external” ODDs, consisting of little more than an internal ODD in a case, are direct purchasers of ODDs and within the Illinois Brick rule.

Finally, in the LCD cases, In re TFT-LCD (Flat Panel) Antitrust Litigation, Case No. 3:07-MD-1827 SI (Apr. 20, 2012) (Illston, J.)., the court split the price-fixing litigation into two stages, following the suggestion of direct purchasers’ counsel. The first stage will focus on whether defendants conspired to raise prices and overcharged direct purchasers; the second stage will be devoted to indirect purchaser claims. Both the direct and indirect purchasers will be able to present conspiracy evidence in the first phase; only the directs will be able to present damages evidence in the first phase.

(See here for prior LCD coverage.)

Filed Under: Northern District of California, Price-Fixing Tagged With: ,

N.D. Cal. Rejects Retail Shelf Space Discounting Claims

April 19, 2012 by Leave a Comment

Discounting is usually pro-competitive.  A recent case in the Northern District of California illustrates just how difficult it is to challenge discounts under the antitrust laws.

Church & Dwight Co. (“C&D”), which makes Trojan-branded condoms, uses discounts.  Retailers get “planogram” or “POG” rebates if they dedicate a specified minimum percentage of the available condom “facings” on their in-store displays to C&D condom products.  The C&D POG program has several tiers, ranging from about 7% to 8% discounts, corresponding to about 65% to 75% of the facings.  These discounts are apparently all above cost. 

C&D has a large (>75%) market share, and its much smaller competitor, Mayer Labs, challenged its rebates, and some other practices, in Church & Dwight Co. v. Mayer Laboratories, Inc., 2012 U.S. Dist. LEXIS 51770 (N.D. Cal. Apr. 12, 2012) (Chen, J.).  In a thorough opinion, the Court granted C&D summary judgment on Mayer Lab’s Sherman Act Section 1 and Section 2 claims.

The Court focused on Mayer Lab’s inability to show any actual harm to competition:

  • Mayer failed to obtain evidence from any retailer’s employees or other third parties as to the supposed coercive or anticompetitive effect of C&D’s rebate program.
  • Over 50% of the industry display space is not even covered by C&D’s POG program.
  • C&D does not force retailers to purchase anything, much less a certain percentage, of products from C&D.  Nor do the agreements force retailers to give any specified amount of shelf space to C&D over its rivals.  Instead, retailers are free to give C&D as much or as little shelf space as they want.  The only consequence is that retailers may not receive a rebate based on those decisions.
  • The C&D agreements are terminable at any time, for any reason, on 30 days notice.

Following Allied Orthopedic Appliances, Inc. v. Tyco Healthcare Group LP, 592 F.3d 991 (9th Cir. 2010), the court ruled that Mayer had not shown any actual injury to competition at the retail level as a result of actual and substantial foreclosure of rivals.

The court considered, and rejected, Mayer’s argument that notwithstanding Allied Orthopedic, C&D’s discontinuous rebate structure (where the rebate percentages jumped up or down instantaneously at certain “facing” percentage points) creates “cliffs” whereby retailers face harsh “penalties” (in the form of lost rebates applicable to all sales starting with the first dollar, thus increasing the costs to the retailer) for moving downward on the rate schedule.  Even assuming this argument had merit and could distinguish Allied Orthopedic, the court concluded that Mayer had no evidence that the POG program in fact has such a coercive effect.  A significant number of large retailers do not participate in the POG program; C&D’s average share of sales at non-POG retailers is roughly on par with its share of sales at POG retailers; and C&D’s shelf share rarely exceeds its overall market share.  Other manufacturers (Durex and Lifestyles) have remained in the market despite the POG program.

In short, a foreclosure rate of perhaps 45% to 50%, coupled with the facts above and the easy terminability of the C&D contracts, is not enough to support either a Section 1 or a Section 2 claim — even when the defendant has a monopoly market share.

The court also rejected Mayer’s arguments that C&D, as a category “captain” (i.e., a manager of shelf space for a category of products) had abused its power to harm competition.  It found no evidence similar to that in Conwood Co., L.P. v. U.S. Tobacco Co., 290 F.3d 768 (6th Cir. 2002).

Filed Under: Discounting, Northern District of California, Rebates Tagged With: , ,

N.D. Cal. Refuses Separate Direct and Indirect Trials in LCD Cases

March 27, 2012 by 3 Comments

In re: TFT-LCD (Flat Panel) Antitrust Litigation, No. M 07-1827 SI (May 21, 2012) (Illston, J.)

In a short order and without expressing her reasoning, Judge Illston refused to conduct separate direct purchaser and indirect purchaser trials in the LCD price-fixing class actions.  The cases will instead be tried together in May.  The direct case includes one defendant (Toshiba).  Three defendants (AU Optronics, LG Display, and Toshiba) remain in the indirect class case.

Filed Under: Northern District of California, Procedure Tagged With: ,

Digital Content Producers Lack Antitrust Standing to Sue Wireless Carriers Over MMS

March 2, 2012 by Leave a Comment
Wireless Telephony

Davis v. AT&T Wireless Services, Inc., No. CV 11-02674 DDP (March 1, 2012) (Pregerson, J.)

Not everyone can sue for an antitrust violation.  Usually, if plaintiffs and defendants do not at least participate in the same market, plaintiffs lack standing.
 
In Davis, Judge Pregerson dismissed antitrust claims against various wireless telephone companies and other defendants brought by a purported class of commercial producers of multimedia content.  Plaintiffs claimed that when the wireless carriers created the Multimedia Messaging Service standard for sending multimedia data files, they agreed not to implement digital rights management measures that would have protected materials copyrighted by third parties.  Allegedly, the carriers’ motive was to increase revenues and profits from the use of MMS.
 
The Court ruled that the plaintiffs had not alleged antitrust injury, and therefore lacked antitrust standing.  Plaintiffs are producers and owners of multimedia content; defendants, to the contrary, are wireless service carriers who enable subscribers to send messages that can include multimedia content.  “Plaintiffs and Defendants are therefore not participants in the same market, and Plaintiffs fail to allege the required antitrust injury.”
 
Filed Under: Northern District of California, Standing Tagged With: ,
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