U.S. District Court Dismisses Auto Parts Maker’s Antitrust Claims Against Wireless Patent Pool
On September 10, 2020, Chief Judge Barbara M. G. Lynn of the U.S. District Court for the Northern District of Texas dismissed a major automotive components manufacturer’s antitrust lawsuit against a group of holders of standard-essential patents (“SEPs”) used in wireless telecommunications and their joint licensing agent Avanci LLC, rejecting claims that defendants’ patent licensing platform and practices violated, inter alia, Sections One and Two of the Sherman Act. Continental Automotive Systems, Inc. v. Avanci, LLC, No. 3:19-cv-02933-M (N.D. Tx. Sept. 10, 2020). In dismissing the case, the Court found that plaintiff had failed to adequately plead (1) antitrust standing, (2) an unlawful agreement to restrain trade under Section One, and (3) the anticompetitive conduct necessary to establish a violation of Section Two. On the monopolization claim, this decision is consistent with the Ninth Circuit’s decision last month in FTC v. Qualcomm Inc., in which the Ninth Circuit reversed the district court and rejected similar Section Two challenges to Qualcomm’s licensing practices for its SEPs. It is also consistent with the U.S. Department of Justice Antitrust Division’s July 28, 2020 favorable business review letter addressing Avanci’s 5G patent licensing platform.
Plaintiff manufactures and supplies telematics control units (“TCUs”) to automobile manufacturers (“OEMs”). These units enable a number of telecommunications functions in vehicles, including cellular connectivity. To access second generation (“2G”), third generation (“3G”), and fourth generation (“4G”) cellular networks, TCUs must comply with various standards set by standard setting organizations (“SSOs”), which in turn require the holders of the patents that are deemed “essential” (i.e., SEPs) to license that technology on terms that are “fair, reasonable, and non-discriminatory” (or “FRAND”). Defendants own certain SEPs for 2G, 3G, and 4G connectivity standards established by various SSOs, which they license in a licensing pool arrangement, with Avanci serving as their joint licensing agent. Plaintiff alleges that defendants have refused to license their SEPs to it on FRAND terms, and instead have insisted on licensing the patents only at the OEM level and not on FRAND terms.
As an initial matter, the Court found that plaintiff’s inability to obtain the SEP licenses needed for its TCUs from defendants on FRAND terms was sufficient to establish injury for purposes of Article III standing. As a matter of antitrust standing, however, it found that this injury was insufficient because it did “not harm its competitive position or its position as a consumer of products used in its devices” because it can still produce TCUs for the OEMs. The Court observed that the OEM-only licensing policy may enable plaintiff “to produce TCUs at a lower cost, since it would not have to pay a license for an SEP, because the OEMs have one.” Further, the court found that, despite alleged indemnification agreements between the OEMs and plaintiff, plaintiff had not established that any alleged injury to the OEMs from the OEMs paying non-FRAND royalties would be passed on to plaintiff. Relying on Qualcomm, the court found that defendants’ charging of “licensing royalties, and alleged harm to OEMs” is a “distinct business practice” from any conduct toward TCU component suppliers, and that alleged anticompetitive conduct directed at the downstream OEMs does not create an antitrust injury for upstream TCU suppliers. The Court also held that, even if an OEM’s antitrust injury could be imputed to plaintiff, the component manufacturer would still not be the best plaintiff to bring this action. Because the alleged antitrust violations are directly felt by the OEMs, Judge Lynn held, plaintiff is merely a “remote or indirect victim” of the alleged scheme.
Turning to the substance of plaintiff’s claims, the Court held that even if plaintiff had adequately alleged antitrust standing, it failed to allege an unlawful restraint of trade under Section One of the Sherman Act. The Court stated that a licensing pool’s royalty agreement does not unreasonably restrain trade if customers have a “realistic opportunity” to obtain individual licenses outside of the pool, which the Avanci agreement allows. In response to plaintiff’s argument that the members in fact refused to license outside the pool or licensed only at the same price, Judge Lynn pointed to certain conduct inconsistent with this allegation and concluded that the complaint did not establish more than mere “parallel conduct”—in other words, independent conduct not the product of an agreement, and therefore insufficient to establish the agreement element of a Section One violation.
With regard to the monopolization claim, the court held that plaintiff failed to plead the anticompetitive conduct necessary to establish unlawful monopolization or a conspiracy to monopolize under § 2 of the Sherman Act.Consistent with Qualcomm and with the Antitrust Division’s statement of interest in this and other cases, Judge Lynn found that the alleged failure of an SEP holder to license its patents on a FRAND basis may be sufficient to establish a contract claim, but does not constitute the anticompetitive conduct necessary for a monopolization claim.Further, the Court expressly disagreed with other U.S. courts that have found that deceitful or fraudulent conduct in the standards-setting process could form the basis of a monopolization claim, an issue that the Ninth Circuit did not address in Qualcomm because the FTC had not shown that Qualcomm engaged in deceptive conduct in the standard-setting process at the trial level.If plaintiff here appeals and the Fifth Circuit affirms, this would set up a circuit split with the Third Circuit, as well as with a number of district court cases in the Ninth Circuit on this issue.
The case is Continental Automotive Systems, Inc. v. Avanci, LLC, no. 3:19-cv-02933-M (N.D. Tex.), in the U.S. District Court for the Northern District of Texas.