In SOLIDFX, LLC v. Jeppesen Sanderson, Inc., Case Nos. 15-1079 and 15-1097 (opinion available here), the Tenth Circuit aligned itself with the First and Federal Circuits to hold that the invocation of intellectual property rights is a presumptively valid business justification sufficient to rebut a Sherman Act Section 2 refusal to deal claim, but left open some questions about when and how the presumption can (if ever) be rebutted. I covered the decision over at the Orrick AntitrustWatch blog here.
Tenth Circuit Rules That Invocation of IP Rights Is Presumptively Valid Defense to Antitrust Refusal to Deal Claims
Getty Images and a group of professional photographers sent a letter this week to the Senate Judiciary’s antitrust subcommittee complaining about Google’s image “scraping.” In a nutshell, Getty alleges that high-resolution images in Google’s image search results end up being the final destination for searchers, not a conduit that carries searchers to the image source (e.g., Getty). As a result, Getty alleges, Google profits from search data while diminishing compensation to the websites that actually own the image rights.
The FTC previously investigated Google for scraping. The FTC staff recommended that the full commission bring antitrust charges against Google for scraping and other practices. (That recommendation was accidentally made public.) The FTC, however, closed its investigation into Google’s search practices, and in 2012 Google issued a letter promising to create an online tool that would allow websites to opt out of having their scraped content displayed in search results on Google. Getty maintains that the opt-out mechanism presents image rights owners with the Hobson’s choice of agreeing to scraping or becoming “invisible” online by opting out of Google’s search results.
The fact that Getty is attempting to leverage government intervention is interesting. Does it not think it has antitrust standing itself to complain? It does not seem to be a competitor or a customer of Google.
I previously covered the case of Cascades Computer Innovation LLC v. RPX Corp., (N.D. Cal.) (Gonzalez Rogers, J.). As I wrote in connection with the court’s refusal to dismiss the plaintiff’s amended complaint in December 2013:
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.
The court stayed the case pending resolution of a claim of infringement regarding the primary patent at issue. Many defendants settled those claims, but Samsung went to trial and ultimately prevailed, receiving a jury verdict of non-infringement.
On February 23, 2016, the Court dismissed the remaining antitrust claims (on a motion for judgment on the pleadings). The court wrote that failure to license an invalid patent cannot serve as the basis for a cognizable antitrust injury.
Plaintiff alternatively argued that it suffered antitrust injury in connection with the other patents in the portfolio, but the court viewed any such purported injury as de minimis. Moreover,
only Samsung is alleged to have infringed any of the other patents. However, the complaint never specifies which other patent Samsung purportedly infringed. Only in its opposition brief does plaintiff finally claim that Samsung purportedly infringed the ‘130 Patent. As described above, the market power assertions are premised on a combination of the manufacturing defendants’ shares. Plaintiff does not contend that Samsung’s share alone—17 percent of Android-based phones, a subset of a larger smartphone market and an even larger cellular phone market—is sufficient to undergird its theory. It is also not plausible, in light of the application of the collateral estoppel doctrine regarding non-infringement, that plaintiff’s failure to license the ‘130 Patent was an antitrust injury where only Samsung is alleged to have infringed the patent. In such circumstances, the complaint does not provide a convincing motive for the other alleged participants to conspire against plaintiff or allege sufficient market power by Samsung individually.
Even if plaintiff could establish antitrust standing, the motion would be granted for plaintiff’s failure to state any viable federal antitrust claim. The Court previously articulated the elements of these federal antitrust claims in connection with its order denying defendants’ motions to dismiss. After supplementing the picture with the patent jury’s finding of non-infringement of the “primary” ‘750 Patent, the FAC utterly fails to satisfy the elements necessary to state federal antitrust claims. Indeed, if the complaint were amended to insert the word “non-infringed” before each of its more than seventy references to the ‘750 Patent, then the lack of plausibility would shine through acutely.
2016 U.S. Dist. LEXIS 22727 (cit. omit.). The court also wrote that it was not inclined to maintain supplemental jurisdiction over state law antitrust and unfair competition claims.
Because the decision turns on a finding of non-infringement, it is not clear to what it extent it presages future dismissals of antitrust claims against defensive patent aggregators.
The answer is (surprise!) “yes.”
There are a number of ways in which antitrust law is relevant to emerging and non-dominant companies. Those firms may:
- Need to deal with the dominant firms in their markets, including by (i) responding to threats or actions by dominant firms to foreclose access to products, services or markets, or (ii) negotiating to acquire or maintain access to needed IP;
- Need access to standard-essential patents (“SEPs”) and to understand their rights to and under FRAND licenses;
- Want to exploit and license their own IP and put restrictions on its use without triggering antitrust issues;
- Want to collaborate with other firms – including (dominant) competitors – in producing products or delivering services (i.e., entering into joint ventures);
- Want to merge with, acquire, or be acquired by another firm, including a dominant one;
- Want to impose vertical price or non-price restraints, or offer different customers, dealers or distributors different prices; or
- Need to respond to a government merger or conduct investigation as a third party.
All of the above issues (and more) require the consideration of antitrust law. This is not to say that, for example, every complaint by an emerging firm against a dominant firm is the nucleus of a valid antitrust claim. There are many considerations – including whether there is harm to competition, whether a party has antitrust standing, and the like – and often there is no claim, just the rough-and-tumble of normal business competition. But it’s always helpful to understand the legal landscape, and to consider whether Congress and the courts have struck the appropriate balance between robust competition and truly exclusionary conduct. And on the defensive end, it’s always a good idea to understand how far you can push restraints.
As far as antitrust law is concerned, trademarks are the unwanted stepchildren of intellectual property. The conventional wisdom is that trademarks – whose exclusionary effect is very attenuated, if it exists at all – do not confer market power, so their use (or refusal to license) can’t support a Sherman Section 2 claim. But is there an argument against the conventional wisdom?
The answer may be: “yes, in unusual circumstances.”(*)
Fraudulently obtaining a trademark
Let’s start by considering other types of IP that present clearer issues. When a patentee obtains a patent through fraud on the PTO, it engages in exclusionary conduct. See Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 177 (1965). Of course if the patentee never enforces his patent, there is likely no injury; the injury occurs when the patentee enforces or attempts to enforce a fraudulently-obtained patent.
Courts have extended the reasoning of Walker Process to the fraudulent procurement of copyrights. See, e.g., Knickerbocker Toy Co. v. Winterbrook Corp., 554 F. Supp. 1309, 1321 (D.N.H. 1982). See also Michael Anthony Jewelers v. Peacock Jewelry, Inc., 795 F. Supp. 639, 647-48 (S.D.N.Y. 1992) (allegations of enforcement of fraudulently-obtained copyright and other conduct were sufficient to support a monopolization claim).
Fraudulent procurement of a trademark also might be exclusionary. See, e.g., Northwestern Corp. v. Gabriel Mfg. Co., 1996 U.S. Dist. LEXIS 19275 (N.D. Ill. 1996) at *19 (“Trademark monopolization or attempted monopolization claims often fall into one of two general categories. The first involves the use of an illegally obtained trademark and focuses on the power of the trademarked product to monopolize a relevant economic market solely as a consequence of its illegal registration.”); Caplan v. Am. Baby, Inc., 582 F. Supp. 869, 871 (S.D.N.Y. 1984) (denying motion to dismiss attempted monopolization counterclaim challenging an attempt to register an unenforceable trademark and to enjoin others from its use despite its cancellation). See also G. Heileman Brewing Co. v. Anheuser-Busch, Inc., 676 F. Supp. 1436, 1473 (E.D. Wis. 1987) (test to be applied in determining whether a particular trademark constitutes a Section 2 violation is the same as in any other case where an unlawful monopoly or attempt to monopolize is alleged; Section 2 is violated only when the trademark owner’s “actions have led to or resulted in a dangerous probability that it will gain a monopoly over the relevant market”), aff’d, 873 F.2d 985 (7th Cir. 1989).
Note that fraud on the PTO is not itself actionable under the Sherman Act; a plaintiff must still plead and prove all the other elements of a Section 2 violation. That is particularly true after Illinois Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 28, 42-43 (2006), where the Supreme Court held that even patents do not presumptively confer market power. Plaintiffs therefore cannot rely on the existence of IP to establish market power. Nor does fraud on the PTO itself establish antitrust injury (i.e., harm to competition). Nevertheless, PTO fraud can constitute the core of a Section 2 claim.
That leaves the question of whether trademarks can confer market power. As a general rule, “[b]ecause trademarks, unlike patents, do not confer exclusionary power over products or services, excluding others from the use of a trademark will not support an attempt to monopolize claim.” II Antitrust Law Developments (7th ed. 2012) at 1131. Still, as one court wrote:
There is no controlling case law addressing whether the attempted enforcement of a trademark can constitute an antitrust violation, but there is persuasive precedent which indicates that if a plaintiff could demonstrate the other elements of a violation of Section 2 of the Sherman Act, then the attempted enforcement of a trademark may constitute an antitrust violation. Specifically, Justice Blackmun noted in his concurring opinion in Vendo Co. v. Lektro-Vend Corp., that “the enforcement of restrictive provisions in a license to use . . . a trademark may violate the Sherman Act.” Moreover, even the case upon which SnoWizard relies, Car-Freshner Corp. v. Auto Aid Mfg. Corp., states [“[t]here is no doubt that a trademark may be utilized in such a manner as to constitute a violation of antitrust laws,” and “trademark laws may not be used to monopolize with respect to a certain product.” Although it is equally clear that the nature of a trademark, which does not in any way represent a monopoly conferred upon a particular product, will make it particularly difficult to establish that “the plaintiffs’ actions have led to or resulted in a dangerous probability that it will gain a monopoly over the product in issue.” Nonetheless, such a claim is possible as a matter of law.
Southern Snow Mfg. Co. v. SnoWizard Holdings, Inc., 2013 U.S. Dist. LEXIS 22157 (E.D. La. Feb. 18, 2013) at *17-18 (footnotes omit.).
The question is whether a fraudulently-obtained trademark protects just the mark itself or some functional aspect of the product. (The PTO shouldn’t issue trademarks that cover the latter.) For example, in RJ Machine Co. v. Canada Pipeline Accessories Co., Case No. 1:13-cv-00579-SS (W.D. Tex. Nov. 22, 2013), the court dismissed antitrust claims predicated upon alleged trademark misuse – but left the door open to future claims based on similar conduct. RJ Machine Co. involved 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 claimed the design of its 50E flow conditioner comprised 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 (petitioning immunity) 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.
Id. at 7.
See also General Physiotherapy, Inc. v. Sybaritic, Inc., 2006 U.S. Dist. LEXIS 3796 (E.D. Mo. Feb. 1, 2006):
While the configurations of the massage head/applicators have always been represented to the public as functional, they were represented to the Patent and Trademark Office (“PTO”) as non-functional. Defendants also claim Muchisky provided other false and/or misleading information to the PTO. This, Defendants contend, indicates the trademark registrations were issued by the PTO based on Muchisky’s fraud and that the trademark registrations are not, and were never, entitled to trademark protection. Defendants argue this evidence, and the evidence of Muchisky’s bullying tactics and intent to monopolize the market, supports a finding that antitrust laws have been violated and creates a genuine issue of material fact regarding General and Muchisky’s claim that they acted in good faith in asserting trademark rights. This Court agrees. General and Muchisky’s motion for summary judgment on this ground will be denied.
Id. at *12 (footnote omit). Consider also the scenario where a fraudulently-obtained trademark is actually an important search term on the Internet.
So – there might be circumstances where a fraudulently-obtained trademark could be used in a way that violates Section 2. But proving a Section 2 violation based on trademark abuse may in practice be difficult to do.
(*) These are just some thoughts. There are responses and rejoinders. My disclaimer is: feel free to read, but I’m not necessarily endorsing this train of thought.
Last week, I co-authored an article in the Los Angeles/San Francisco Daily Journal on the California Supreme Court’s recent decision in the Cipro Cases. There, the Court held that so-called “reverse payment” patent settlements are evaluated under a specific “structured” Rule of Reason analysis, and rejected plaintiffs’ arguments that settlement payments exceeding the costs of litigation or the value of services provided by a generic manufacturer are per se unlawful.
The article is behind a pay wall. When I get clearance to republish it, I will do so here.
* Updated 06/08/2015: The article is attached. * FNL-Orrick (DJ-5.14.15)
Marketplace.org has the story. A nice little summary of the new Google case and the principle that while “[h]aving a big market share by itself is OK,” “the problem is when companies abuse that market share by taking anticompetitive actions that hurt  competitors and customers.” A good link to share with non-antitrusters.
Franklin Foer, at the New Republic, argues that the answer is yes. The alleged “crime”: predatory pricing — if not express, than at least in spirit.
In “There’s one huge problem with calls for anti-trust action against Amazon” at vox.com, Matthew Yglesias rightly points out that market share does not by itself a monopoly make, and further argues that
One important hint about Amazon’s non-monopoly status can be found in its quarterly financial reports. That’s where you find out about a company’s profits. In its most recent quarter, for example, Amazon lost $126 million. Losing money is pretty typical for Amazon, which is not really a profitable company. If you’d like to know more about that, I published 5,000 words on the subject in January. But suffice it to say that “low and often non-existent profits” and “monopoly” are not really concepts that go together.
Competitors hate Amazon because retail was an ultra-competitive low-margin game before Jeff Bezos ever came to town. To delve into this field and make it even more competitive and even lower-margin seems somewhere between unseemly and insane — but it’s the reverse of a monopoly.
Of course, U.S. price predation law can be violated when a firm prices below cost — and loses money — if it is likely to recoup its losses later after its competitors exit the market and it raises prices. Query whether that is a possibility with online distribution — I don’t know, and am not taking a position for now, but there are certainly reasons to be pretty skeptical — low entry barriers and the like.
Interesting discussion, though.
Update: Paul Krugman says that “Amazon’s Monopsony Is Not O.K.” But the problems he identifies seem largely theoretical.
Update II: The Wall Street Journal reports that Amazon just reported its biggest operating loss.
It’s really a very difficult thing to do — and query whether it’s worth the effort. See, e.g., The Apple iPod iTunes Antitrust Litigation, 2014 U.S. Dist. LEXIS 136437 (N.D. Cal. Sept. 26, 2014) (Gonzalez Rogers, J.) (denying Daubert motions all around). At least that’s true when the economist is a well-known professor at a major university.
The iPod litigation is, by the way, quite interesting . . . the court has refused to grant Apple summary judgment on the claim that an iTunes update caused consumer lock in. In an earlier summary judgment order, the court found a triable issue of fact as to whether iTunes update 7.0 was a genuine product improvement so as to not be anticompetitive.
In PNY Technologies, Inc. v. SanDisk Corp., Case No. C-11-04689 (N.D. Cal. Apr. 25, 2014) (Orrick, J.), the court dismissed PNY’s exclusive dealing and attempted monopolization claims. I previously covered the case here.
The case is significant because it found – on a motion to dismiss – that allegations of foreclosure from a substantial percentage of retail outlets were insufficient as a matter of law. The court took judicial notice of SanDisk’s contracts with retailers under the “incorporation by reference” doctrine, and proceeded to conclude that because they were terminable on short notice, they did not plausibly foreclose competition. Unfortunately, due to protective order issues, the court redacted information on the term(s) of SanDisk’s exclusives, so we don’t know precisely how long would be too long.
The court also determined that PNY had failed to adequately plead a lack of alternative channels of distribution. Although PNY alleged that non-retail channels were insufficient, the court held that PNY’s allegations were wholly conclusory and therefore insufficient. The court gave PNY leave to amend.
The case is a (relatively) uncommon exclusive dealing victory at the motion to dismiss stage for defendants. It shows that courts will scrutinize and look at exclusive dealing contracts (even if not attached to the complaint). It also demonstrates that in the case of short-term exclusives, and where the plaintiff does not allege in substantial detail why other distribution channels are insufficient to compete, plaintiffs’ claims may be dismissed.