Revised Market Definition For Patents Still Fails To State Plausible Claims Against Investment Manager
On January 6, 2020, Judge Edward M. Chen of the United States District Court for the Northern District of California granted defendants’ motion to dismiss. Intel Corp., et al. v. Fortress Investment Group LLC, et al., No. 19-cv-07651-EMC (N. D. Ca. 2021). Plaintiffs alleged that defendants conspired to aggregate and assert essential patents against plaintiffs, which harmed competition in 13 alleged markets for patented technologies. Plaintiffs asserted this conduct violated Sherman Act § 1, Clayton Act § 7, as well as unfair competition law under state and FTC statutes. The Court dismissed plaintiffs’ complaint with prejudice as to the FTC Act claim as well as the other claims as they related to several product markets. It dismissed without prejudice claims as to the other markets to the extent plaintiffs could further amend their claims.
The Court characterized plaintiffs’ allegations into two theories: (1) patent aggregation and (2) the transfer of standard essential patents (“SEP”). Plaintiffs’ patent aggregation theory was that that defendant-investment firm, in partnering with various patent holders in the market, amassed “thousands” of patents that allowed it to make “endless patent assertions” to coerce plaintiffs to license patents in 13 product markets spanning patented technologies from local cache management to health monitoring. Plaintiffs argued that prior to defendant-investment firm’s patent aggregation, separate patent holders competed with each other for sales, but defendant’s aggregation of competing patents caused a consolidation of market power and the ability to overcharge in licensing fees.
At the outset, the Court found that plaintiffs did not allege that defendants asserted patents in four of the markets, and speculation that they would do so was insufficient to state a claim as to those alleged markets. As to the remaining nine markets, the Court found that plaintiffs’ patent aggregation claims as to six of its alleged markets were inadequately pled and overbroad because plaintiffs market allegations merely described “general technical fields” and not specific patented functions.
Further, plaintiffs failed to plausibly plead that defendants’ conduct had anticompetitive effects in each of the product markets. The Court acknowledged that it was an open legal issue whether pleading supracompetitive pricing alone was sufficient to show direct anticompetitive effects. Assuming the law in plaintiffs’ favor, the Court analyzed plaintiffs’ allegations in one defined market, the network-based voice messaging patents market, as a representative example. Ultimately, the Court found that plaintiffs failed to adequately allege that defendants extracted supracompetitive royalties in that market as a result of patent aggregation because (1) plaintiffs did not allege the amounts paid to settle the allegedly anticompetitive patent litigation, (2) the fact that prior owners did not assert the patents did not mean those patents were worthless prior to aggregation, (3) plaintiffs’ allegations about royalty charges for other patents in the industry were not necessarily comparable to the at-issue patents, (4) the large damages that defendants demanded in patent litigation was not necessarily irrational or suggestive of anticompetitive conduct, and (5) prior to aggregation, four of the five patents at issue were already held by one owner (contradicting plaintiffs’ allegation that the pre-aggregation market was highly competitive).
The last and “perhaps most fundamental[ ]” reason supporting dismissal of the patent aggregation claims was that plaintiffs failed to allege whether other substitute patents were available in the market, noting that “the Court has no idea whether these five patents represent the ‘crown jewels’ of the field or just a small portion of a large field of substitutes.” Id. at 25. The Court held that without pleading such facts, the Court could not infer that defendants were able to extract supracompetitive royalties. The Court held that these same failures existed as to the other alleged markets.
The claims under the SEP transfer theory were brought under state unfair competition statutes and the FTC Act. Plaintiffs alleged that third parties transferred what were declared to be “standard essential patents” to defendants, who then asserted those patents against plaintiffs. Within the telecommunications industry, organizations like ETSI set certain technologies as global industry standards, thus constraining or eliminating the industry’s use of alternative technologies. Patents that ETSI members believe are or may become essential to an ETSI standard are declared standard essential patents, which ETSI members must license on “FRAND” or “fair, reasonable, and nondiscriminatory” terms. Non-members are not obligated to license under FRAND terms. Plaintiffs alleged that defendants circumvented FRAND commitments by acquiring standard essential patents from ETSI third-party patent holders – such as Panasonic, Nokia, Huawei, and Philips (all of whom were ETSI members) – and then charging non-FRAND terms and engaging in aggressive patent litigation, while representing that they hold standard essential patents.
The Court found that plaintiffs’ SEP transfer theory lacked merit. Following FTC v. Qualcomm Inc., 969 F.3d 974, 992 (9th Cir. 2020), the Court held that a breach of a commitment to a standard-setting organization like ETSI did not rise to the level of an antitrust violation. The Court also reiterated the policy that antitrust laws should not be used to remedy contractual disputes between private parties pursuing technological innovation.
The Court granted leave to plaintiffs to file a second amended complaint. The Court acknowledged that plaintiffs have alleged with more specificity as to plausible product markets in this first amended complaint and requested further narrowing in addition to greater detail as to defendants’ market power within those markets.
This case serves as a reminder of the significance of sufficiently pled facts for market definition – instead of cursory conclusions masquerading as factual allegations – at the motion to dismiss stage. Parties to patent and technological innovation antitrust cases should continue to follow courts’ evolving jurisprudence applying antitrust concepts to technology market-related contracts.