Distribution, Competition, and Antitrust / IP Law

Strategic Refusals to License IP — Slide Deck

I’ve uploaded my slide deck from the Advanced Antitrust U.S. conference (Feb. 6, 2014) on strategic refusals to license IP.  You can find a copy here.

“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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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.

Reverse-Payment Patent Settlements Subject to Antitrust Analysis

The Supreme Court today decided FTC v. Actavis, Inc. and held, in a 5-3 decision authored by Justice Breyer, that so-called reverse-payment patent settlements are subject to full antitrust Rule of Reason analysis.

In a reverse-payment settlement, which often occurs in the context of pharmaceuticals and the Hatch-Waxman Act, the patentee sues an alleged infringer, and the parties settle the litigation with the patentee agreeing to pay the alleged infringer monetary consideration in return for an agreement that the alleged infringer will stay out of the market during some period of time up to the full remaining duration of the patent.  Some circuit courts and many commentators had agreed that such settlements — as long as they do not extend the patent monopoly or involve sham patents or sham patent litigation — are lawful under the antitrust laws.

The Supreme Court disagreed and largely sided with the FTC on this issue (although it declined to apply the truncated “Quick Look” Rule of Reason to such settlements, instead preferring the full Rule of Reason inquiry into pro-competitive and anticompetitive effects).  Instead, the Court discussed a handful of factors that led it to believe reverse-payment settlements, even if their anticompetitive effects fall within the zone of exclusion of the patent, can be unlawful under the Rule of Reason.

I covered reverse-payment settlements previously (check out the settlement tags/categories).  As the Patently-O blog correctly notes, as a result of Actavis, “antitrust implications should be considered for any major patent settlement. In addition, the decision opens the door further for antitrust action against patent enforcement entities willing to settle cases at rates below the likely litigation costs of the accused infringers.”

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White House Targets Patent “Trolls”

The White House today issued a fact sheet on high-tech patent issues, recommending seven legislative actions and taking five executive actions. According to the White House’s statement, innovators continue to face challenges from Patent Assertion Entities (PAEs), companies that, in the President’s words “don’t actually produce anything themselves,” and instead develop a business model “to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.” These entities are commonly known as patent “trolls.”

Of the seven legislative recommendations, I think the following four are the most interesting and potentially most significant:

Require patentees and applicants to disclose the “Real Party-in-Interest,” by requiring that any party sending demand letters, filing an infringement suit or seeking Patent and Trademark Office (PTO) review of a patent to file updated ownership information, and enabling the PTO or district courts to impose sanctions for non-compliance.

Permit more discretion in awarding fees to prevailing parties in patent cases, providing district courts with more discretion to award attorney’s fees under 35 USC Sec. 285 as a sanction for abusive court filings (similar to the legal standard that applies in copyright infringement cases).

Protect off-the-shelf use by consumers and businesses by providing them with better legal protection against liability for a product being used off-the-shelf and solely for its intended use. Also, stay judicial proceedings against such consumers when an infringement suit has also been brought against a vendor, retailer, or manufacturer.

Change the International Trade Commission (ITC) standard for obtaining an injunction to better align it with the traditional four-factor test in eBay Inc. v. MercExchange, to enhance consistency in the standards applied at the ITC and district courts.

The executive actions are more limited, including new and expanded PTO education and outreach materials. But of some note is a new PTO rulemaking process to require patent applicants and owners to regularly update ownership information when they are involved in proceedings before the PTO, specifically designating the “ultimate parent entity” in control of the patent or application. And the PTO will provide new targeted training to its examiners on scrutiny of functional claims and will, over the next six months, develop strategies to improve claim clarity, such as by use of glossaries in patent specifications to assist examiners in the software field. Also of note is an interagency review of existing Customs and Border Protection (CBP) and ITC procedures used to evaluate the scope of exclusion orders.

The following White House chart shows the remarkable recent growth of PAE litigation:

patent_troll_chart

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Patent Exhaustion Doctrine Does Not Protect Farmers Who Replant Patented Seeds

In a brief, unanimous opinion written by Justice Kagan, the Supreme Court yesterday agreed with Monsanto that the patent exhaustion doctrine does not enable farmers to replant and reproduce patented seeds without the patentee’s permission. The Court emphasized the well-established rule that the doctrine restricts a patentee’s rights only as to the particular articles sold, and leaves untouched the patentee’s ability to prevent a buyer from making new copies of the patented item.

The Court did expressly note that its holding was limited – addressing the situation before it, rather than every one involving a self-replicating product. “In another case, the article’s self-replication might occur outside the purchaser’s control. Or it might be an incidental step in using the item for another purpose . . . . We need not address here whether or how the doctrine of patent exhaustion would apply in such circumstances.”

I covered the patent exhaustion doctrine previously – see, for example, here, here, and here.

The decision likely has implications in other industries. For example, BSA/The Software Alliance filed a brief arguing that a contrary decision might “facilitate software piracy on a broad scale” because software can be easily duplicated. However, it also noted that a decision that went too in favor of protecting patent rights might unduly encourage nuisance software patent infringement suits.

The opinion, styled Bowman v. Monsanto Co., No. 11-796 (May 13, 2013), is available here.

Should Antitrust Regulate Trolls?

Look at them, troll mother said. Look at my so...

(Photo credit: Wikipedia)

Professor Michael Carrier has written a recent op-ed over at arstechnica suggesting that the answer is “yes.”  Highlights:

“To start, [the antitrust agencies] can challenge concerning aggregations of patents . . . . [M]assive patent portfolios can be used offensively and can be valuable because of their size rather than the validity of each patent. These portfolios can have anticompetitive effects, including holdup, raised rivals’ costs, increased price, and reduced innovation.”

“The agencies could also promote transparency. Much troll activity today is hidden beneath a labyrinth of shell companies . . . .  Given this, how could potential targets engage in licensing negotiations or evaluate patent portfolios? The agencies must be able to shine sunlight on this subterranean network, obtaining complete information from patent acquisitions, among other conduct, to determine competitive effects.”

“It seems particularly slippery for trolls to avoid promises made by their predecessors. The agencies could prohibit transfers to trolls that refuse to adhere to promises to keep licensing costs reasonable.”

The article discusses other ideas as well, and also suggests that Section 5 of the FTC Act could be used where “certain trolls have market power in technology (licensing) markets, do not offer non-trivial efficiencies, and cause competitive harm that results in higher prices or reduced innovation for consumers.”

(Note: some people prefer the term “patent assertion entities,” or PAEs, over the term “trolls.”)

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Free Product Distribution or Discounted Component Distribution Likely Does Not Exhaust Patent Rights

OneTouch Ultra2 is being used by a diabetic pa...

OneTouch Ultra2 is being used by a diabetic patient. (Photo credit: Wikipedia)

In LifeScan, Inc. v. Shasta Technologies, LLC, 2013 U.S. Dist. LEXIS 38677 (N.D. Cal. Mar. 19, 2013), Judge Davila granted plaintiff’s motion for a preliminary injunction to address claims of patent infringement, and addressed whether patent exhaustion doctrine applies to free distribution of product or to discounted distribution of only one component of a product.

I previously covered patent exhaustion doctrine here.  In a nutshell, the patent monopoly is exhausted after a patentee sells the patented invention in whole, or under certain circumstances, in part. (A license to use technology in a certain field of use, however, generally does not trigger the exhaustion doctrine, also known as the first sale doctrine.)

In LifeScan, the plaintiff markets and sells the “OneTouch Ultra System,” a glucose monitoring system. The system is composed of both a meter and disposable test strips. A patent covering “DoubleSure Technology” specifies a method designed to improve the reliability and accuracy of glucose measurements. The technology uses a self-testing strip design using multiple sensors.

Defendants made strips for use in the OneTouch Ultra System (thus prompting the patent suit), and argued that LifeScan’s patent rights were exhausted for two reasons. The court rejected each argument.

First, LifeScan has doctors distribute free OneTouch Ultra kits, comprised of meters and test strips, to diabetic patients. The court held – at least at the preliminary injunction stage – that LifeScan could likely show that this free distribution did not exhaust its patent rights. LifeScan receives no remuneration at the moment it parts with the patented invention. The fact that LifeScan distributes the kits in consideration of patients’ anticipated future repeat purchases of disposable test strips was not enough. According to the court, the common theme running through prior case law – which did not squarely address the issue before the court – was that there must be consideration at the time of the authorized sale in order for the patent exhaustion doctrine to attach.

Second, LifeScan sells OneTouch Ultra meters alone at a reduced price. But this practice too, the court held, likely does not trigger patent exhaustion, because the patent at issue is a method patent that requires both a meter and a test strip for an individual to practice it. “As such, the sale of the meter by itself does not necessarily convey the entire invention of the . . . patent to the purchaser, casting the applicability of exhaustion into doubt.”

The decision reaches the appropriate result – patent rights should not be lost merely because of a novel distribution system, one that is likely pro-competitive because it fosters dissemination of new technology.

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Speaking on the Nine Potential Patent Licensing “No-Nos”

On March 13, 2013 at 1:00 p.m. Eastern Time, I’ll be speaking at a Licensing Executives Society webinar on the nine patent licensing no-nos.  You can find more information about the webinar here.

Readers of this blog will know that I recently wrote a series of posts on this topic.

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

The official online color is: #A4C639 . 한국어: 공...

(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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