Distribution, Competition, and Antitrust / IP Law

Litigation Costs Are Monopolization Damages

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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eBay and PayPal Can’t Cut Tying Claims

photo credit: Wikipedia

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

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.

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

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.”

Northern District of California Antitrust Roundup

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.)

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

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).

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

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.

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

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.”
 

Antitrust Plaintiffs Sanctioned for Pursuing Overbroad Third Party Discovery

In re NCAA Student-Athlete Name & Likeness Licensing Litigation, No. 09-cv-01967 CW (NC) (Feb. 27, 2012) (Cousins, M.J.).

Parties sometimes exercise little thought in serving non-parties with document subpoenas, figuring that it’s best to cast as wide a net as possible at the beginning, and that they can worry about the details later. That may not be the best strategy.

NCAA

In NCAA, plaintiffs, former student-athletes who played Division I basketball and football at NCAA schools, brought antitrust claims, claiming that the NCAA and its members conspired to deny them compensation relating to the use of their names, images, and likenesses. The plaintiffs served subpoenas on various third parties, including The Big Ten Conference and the Fox Broadcasting Company, seeking information on the use of names, images, and likenesses in recorded television broadcasts.

The third parties objected to the subpoenas, and the plaintiffs moved to compel. The Court (Cousins, Magistrate Judge) found that the requests were over broad and unduly burdensome and denied the plaintiffs’ motions. The court concluded that there was “no evidence that antitrust plaintiffs considered additional limitations to the breadth of the document requests” based on the recipients’ very specific objections, but instead “rejected reasonable attempts to compromise.” The Court also imposed sanctions on the plaintiffs, ordering them to pay for the costs incurred by the non-parties in connection with the plaintiffs’ motions.

It’s always best to try to negotiate the scope of subpoenas and work out appropriate compromises. Litigating motions to compel can be at best a distraction and at worst can result in a denied motion and an order to pay costs.

 

N.D. Cal. Addresses Form of Attorneys-Eyes-Only Protective Orders

Barnes & Noble, Inc. v. LSI Corp., No. C-11-2709 EMC (LB) (Beeler, Magistrate J.).

On February 23, Magistrate Judge Beeler entered an order in an area that is usually subject to stipulation: the form of a protective order. The Court found that each side’s proposed protective order was insufficient. B&N’s proposed order inappropriately would have allowed its in-house counsel access to a “broad swath” of defendants’ attorneys-eyes-only-designated material. Defendants’ proposed protective order inappropriately would have barred B&N’s in-house counsel from license agreements that likely will be necessary for those attorneys to participate in meaningful settlement discussions. The Court directed the parties to present a new protective order compliant with the Court’s reasoning.

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