03/06/2014

Cascades Comp. Innovations v. RPX: Determining Whether Patent Licensing Structures Amount to Antitrust Violations


Category: Antitrust 
 
 
 
By: John Kirkpatrick, Contributor  
 
TitleCascades Comp. Innovations LLC v. RPX Corp., No. 4:12-cv-01143 (N.D. Cal. Dec. 3, 2013).
Issues
[1] Cascades' Section 1 claims require Cascades to allege a plausible conspiracy—in this case, a hub-and-spoke conspiracy in which RPX is the hub and the Manufacturing Defendants are the spokes. Cascades Comp. Innovation at *10.
[2] Defendants further contend that, even if the Court finds a restraint of trade, Cascades has pled no unreasonable restraint of trade [under Section 1]. Id. at *20.
[3] [Cascades' Section 2 claims] must allege [among others] monopsony power in the relevant market. Id. at *25 (text added).
Holdings
[1a] The allegations plausibly describe an invitation to common action [i.e., agreement among the Manufacturing Defendants], and to have RPX coordinate that action. Cascades Comp. Innovations  at *18 (text added).
[1b] [Refraining] from exercising [...] right to negotiate individually [and] deal [...] either through [RPX] or not at all [supports] the inference of a second, "off-the-books" agreement or understanding between each Manufacturing Defendant and RPX. Id. at *19 (text added, citations removed).
[2a] [In view most favorable to Cascades,] settlements by [other RPX members] could support an inference that [Cascade's U.S. Patent No. 7,065,750] was valid and infringed, lends a competitive advantage, and had been driven to sub-competitive prices by the three Manufacturing Defendants' domination of the buyer's market, leading smaller players to capitalize on the market conditions [i.e., restraint on trade] created by the alleged conspiracy. Id. at *20-21 (text added).
[2b] [In alleging an unreasonable restraint on trade the] proper focus of the market analysis in monopsony cases is "the commonality and interchangeability of the buyers, not the commonality or interchangeability of the sellers." Id. at *23.
[3] Nothing in [Cascades' First Amended Complaint ("FAC")] suggests that anyone would or could participate in the "upstream" market for the '750 Patent except for the makers of the Android devices. Id. at *26.
 
 

Procedural HistoryIn its Jan. 24 Order dismissing Cascades' complaint with leave to amend, the Court rested its holding on a determination that Cascades had engaged in "generic pleading," and did not pass on the merits of Defendants' competing interpretation of the complaint. Cascades Comp. Innovation at *12.
 
 
 
Legal Reasoning (Gonzalez)
Background[Cascades is] a "non-practicing entity [NPE]," [...] that "enforces patent rights against accused infringers in an attempt to collect licensing fees. [...] The Manufacturing Defendants [HTC, Motorola, and Samsung] manufacture mobile devices that allegedly employ Android and infringe [the '750 patent] sell more than 90 percent of [Android] mobile phones and 75 percent of [Android] tablets. RPX [protects the Manufacturing Defendants] from [...] infringement claims brought by NPEs. RPX members [...] enter into a subscription agreement with RPX [and receive] a license to practice RPX-controlled patents. [...] [The] agreement "purportedly give[s] members the ability to deal independently in their own self-interest." [RPX also purchases and negotiates] "for the acquisition of specific patent rights [for its members]" [to obtain] reduced royalty rates. [Cascades alleges that RPX initiated] negotiations [for the '750 patent and others, collectively, the Elbrus Patents, during which] Cascades [sued for infringement of the '750 patent] against individual Manufacturing Defendants. Cascades Comp. Innovation at *3-4 (text added, citations omitted). Cascades' [FAC] is that Defendants' alleged conduct constitutes a conspiracy to monopsonize the market to buy Cascades' patent licenses, in violation of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2. [...] The Manufacturing Defendants and RPX have filed separate motions to dismiss the FAC. Id. at *1-2 (text added).
Antitrust Standard for Relief Under Rule 12(b)(6) Motion to DismissAll of a plaintiff's well-pleaded allegations of material fact are taken as true and construed in the light most favorable to the plaintiff. [...] In the antitrust context, "a court must determine whether an antitrust claim is 'plausible' in light of basic economic principles." [...] [A] claim may proceed only if the facts alleged foster a reasonable inference of liability, stronger than a mere possibility. Id. at *8 (text added, citations removed). "[I]f there are two alternative explanations, one advanced by defendant and the other advanced by plaintiff, both of which are plausible, plaintiff's complaint survives. Plaintiff's complaint may be dismissed only when defendant's plausible alternative explanation is so convincing that plaintiff's explanation is implausible." Id. at *11 (text added, citations removed).
[1] and [2]: Section 1 of the Sherman Act: Unreasonable Restraint of Trade
Elements Under Section 1 of the Sherman ActThe Supreme Court has construed the statue to prohibit [...] only unreasonable restraints of trade. To state a claim under Section 1, a plaintiff [must plead] evidentiary facts which, if true, will prove: (1) a contract, combination or conspiracy among two or more persons or distinct business entities; (2) by which the persons or entities intended to harm or restrain trade or commerce among the several States, or with foreign nations; (3) which actually injures competition." These elements must be pled "with enough factual matter (taken as true) to suggest that an agreement was made." Cascades Comp. Innovation at *9 (text added, citations removed).
[1] Conspiracy
Legal ElementsCascades must allege both a horizontal agreement between the Manufacturing Defendants (that is, a connecting "rim") and vertical agreements (or "spokes") between RPX and each individual Manufacturing Defendant. Id. at *10 (text added, citations removed).
[1a] The Allegations Plausibly Describe an Invitation to Common Action, i.e., Horizontal AgreementRPX [argues that the alleged hub-and-spoke conspiracy lacks] a rim connecting the Manufacturing Defendants [by failing] to allege that RPX served as the [the] go-between. [Cascades] alleges organizational membership [...] and parallel conduct (the Manufacturing Defendants' refusal to deal independently with Cascades), [and raises] "a suggestion of a preceding agreement" [by alleging] facts which [...] are suggestive of concerted action. Specifically, [...] Motorola, affirmatively expressed a desire to conduct business only through RPX. [...] [A]fter Cascades and RPX reached an agreement as to price, [RPX] told Cascades that RPX members, in the plural, had raised the amounts necessary to fund the deal [suggesting] RPX members' awareness. [L]ater, [RPX] informed Cascades it had to withdraw its offer at the previously agreed-on price because at least one RPX member refused to pay that amount. This allegation, if proved, could constitute direct evidence of RPX's knowledge, and circumstantial evidence of RPX members' knowledge, that the RPX members funding the deal—[including the] Manufacturing Defendants—had to agree on a price for Cascades' licenses. Supporting this inference is the allegation that [RPX] informed Cascades that RPX would decline to pursue a license for the '750 Patent alone because RPX's "clients"—collectively—wanted to license Cascades' entire portfolio. This allegation supports a reasonable inference that the Manufacturing Defendants and RPX had agreed on a concerted course of action regarding how to deal with Cascades. [T]he Manufacturing Defendants' lack of response to Cascades' individual [...] offers, notwithstanding the offers' rebate for the first to accept, plausibly suggests the existence of an agreement among Manufacturing Defendants to refrain from dealing individually with Cascades. The allegations also support a reasonable inference that RPX coordinated responses amongst the Manufacturing Defendants. [...] The allegations plausibly describe an invitation to common action, and to have RPX coordinate that action. Id. at *16-18 (text added, citations removed).
[1b] Inference of a "off-the-books" Understanding Between each Manufacturing Defendant and RPX, i.e., Vertical AgreementThe Manufacturing Defendants contend that mere membership in RPX and agreement to fund a potential deal does not amount to a vertical conspiracy [because the agreement] allows individual RPX members [...] "to deal independently in their own self-interest . . . .". [...] [The FAC] also suggests that [...] 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 understanding [...] is suggested by [Motorola's] alleged refusal to negotiate with Cascades except through RPX. The FAC further alleges that, when presented with individual licensing offers including inducements for the first to accept, no Manufacturing Defendant responded. These allegations support the inference of a second, "off-the-books" agreement or understanding between each Manufacturing Defendant and RPX. Id. at *18-19 (text added, citations removed).
[2] Restraint of Trade
Legal ElementsUnder the rule of reason, a plaintiff must plead that the challenged agreement, by virtue of the defendants' market power, was unreasonably restrictive of competition in a relevant market and that the plaintiff suffered antitrust injury. The relevant market has two dimensions: the "relevant geographic market" and the "relevant product market." [...] [B]ecause the validity of the relevant market typically is a factual rather than a legal issue, an antitrust complaint survives dismissal under Rule 12(b)(6) "unless the alleged market suffers a fatal legal defect." Id. at *21-22 (text added, citations removed, footnote 8, removed, explains why the rule of reason standard is applied).
[2a] Reasonable to Infer Restraint of Trade[Defendants] argue that Cascades fails to allege any restraint of trade [...] because [...] RPX members' subscription agreement with RPX permits members to negotiate independently of RPX. RPX further argues that Cascades' allegations of a restraint on trade are contradicted by the fact that RPX members LG and Philips negotiated individual deals to license the '750 Patent with Cascades. [...] That alleged co-conspirators LG and Philips "broke" from the alleged conspiracy by settling their claims with Cascades does not render implausible the inference of a secondary agreement to deal with Cascades only through RPX. On the contrary, the settlements by LG and Philips could support an inference that the '750 Patent was valid and infringed, lends a competitive advantage, and had been driven to sub-competitive prices by the three Manufacturing Defendants' domination of the buyer's market, leading smaller players to capitalize on the market conditions created by the alleged conspiracy. Id. at *20-21 (text added, citations removed).
[2b] Alleged Unreasonable Restraint; Market of Buyers of Licenses of the '750 Patent is Plausible MarketDefendants argue that, even if the FAC alleges some restraint on trade, it fails to allege an unreasonable restraint under either the per se or the rule of reason tests. The Court [...] concludes that the FAC's allegations suffice to plead a violation of the rule of reason. Id. at *21 (footnote and citation removed). [Cascades] has identified as the relevant product market the market for "purchase, acquisition or licensing of technology covered by" all the Elbrus Patents, with the market for licenses under the '750 Patent alone allegedly constituting a relevant submarket. [...] Manufacturing Defendants contend that the FAC must be dismissed because Cascades has pled no facts regarding competing technologies that the Manufacturing Defendants could use instead of the '750 Patent. [However,] Cascades alleges a monopsony in the market to buy Cascades' patents, not a monopoly in the market to sell them. The proper focus of the market analysis in monopsony cases is "the commonality and interchangeability of the buyers, not the commonality or interchangeability of the sellers." Here, the Manufacturing Defendants allegedly comprise between 75 and 90 percent of at least the relevant submarket of buyers of licenses under the '750 Patent. That suffices to establish a plausible market. Id. at *23-24 (text added, citations removed).
[3] Section 2 of the Sherman Act: Monopsonization
Elements Under Section 2 of the Sherman ActTo plead actual monopsonization, a plaintiff must allege: (1) monopsony power in the relevant market, (2) that was willfully acquired and (3) caused antitrust injury. Pleading monopsony power requires allegations of a "dominant" market share, generally at least 65 percent. Cascades Comp. Innovations at *21-22 (citations removed).
Defendant's Monopsony Power Alleged in the Market for the '750 PatentCascades alleges that RPX wields monopsony power in the market for [...] the '750 Patent—by virtue of its role as purchasing agent for the Manufacturing Defendants, "who collectively control more than 90% of the mobile phone business using the Android operating system and 75% of the combined mobile phone and tablet business." RPX, however, discounts these allegations as pertaining only to the Manufacturing Defendant's share of the "downstream" product market for Android mobile devices but saying "nothing about their buyer share in the upstream input market" for the '750 Patent. [...] Nothing in the FAC suggests that anyone would or could participate in the "upstream" market for the '750 Patent except for the makers of the Android devices that the '750 Patent allegedly optimizes. Id. at *26 (text added, citations removed).
Conclusion
[1a,b] [T]he Court finds that Cascades has alleged facts sufficient to infer the plausible existence of a hub-and-spoke conspiracy. Accordingly, Defendants' motions to dismiss are DENIED to the extent they challenge Cascades' pleading of the conspiracy element of its Section 1 claims. Cascades Comp. Innovation at *20 (text added).
[2a] [T]he Court DENIES Defendants' motions to dismiss to the extent they argue Cascades fails plausibly to allege a restraint on trade. Id. at *21 (text added).
[2b] [T]he Court DENIES both motions to dismiss to the extent they are premised on a failure to allege an unreasonable restraint of trade. Id. at *25 (text added).
[3] The Court DENIES RPX's motion to dismiss to the extent it seeks dismissal of Cascades' Section 2 claims for failure to allege market power and market share. Id. at *26.
 
 
 
Contributor Note
Noerr Pennington ImmunityThe Noerr-Pennington doctrine stems from the First Amendment right to petition the government, and immunizes from civil liability both (1) petitioning activity itself—for instance, "[a] complaint, an answer, a counterclaim"—and (2) "conduct incidental to a petition." Only those litigation activities that communicate to the court constitute petitioning activity itself. Still, conduct incidental to a petition, including "communications between private parties," may enjoy Noerr-Pennington protection, "so long as they are sufficiently related to petitioning activity." The Ninth Circuit has expressly held, however, that "[a] decision to accept or reject an offer of settlement is conduct incidental to the prosecution of the suit and not a separate and distinct activity which might form the basis for antitrust liability." [Defendants] contend that "the decision to accept or reject a licensing offer from Cascades under the circumstances described in the [FAC] was a decision whether or not to settle Cascades' patent claims." [...] Defendants [also] contend that Sosa v. DIRECTV, Inc., 437 F.3d 923, 933 (9th Cir. 2006) supports a finding of Noerr-Pennington immunity here, regardless of the timing of any licensing negotiations vis-à-vis the [infringement] lawsuits, because any refusal to settle was simply conduct in anticipation of a lawsuit. Manufacturing Defendants essentially ask the Court impermissibly to draw inferences in their favor rather than Cascades', notwithstanding this case's procedural posture and the confinement of the Court's inquiry to the well-pleaded allegations of the FAC. Cascades Comp. Innovation at *26-29.

 
 
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