Intel Corporation et al v. Fortress Investment Group LLC et al, No. 3:2019cv07651 - Document 230 (N.D. Cal. 2021)
Court Description: (PUBLIC/REDACTED VERSION) - ORDER Granting 203 Defendants' Motion to Dismiss. Signed by Judge Edward M. Chen on 1/6/2021. (emcsec, COURT STAFF) (Filed on 1/6/2021)
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Intel Corporation et al v. Fortress Investment Group LLC et al Doc. 230 Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 1 of 29 1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 INTEL CORPORATION, et al., Plaintiffs, 8 10 11 PUBLIC/REDACTED VERSION v. 9 Case No. 19-cv-07651-EMC FORTRESS INVESTMENT GROUP LLC, et al., ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS Docket No. 203 United States District Court Northern District of California Defendants. 12 13 14 Plaintiffs Intel Corporation and Apple Inc. have filed an antitrust suit against Fortress 15 Investment Group LLC and affiliated entities. The Court previously granted Defendants’ motion 16 to dismiss but with leave to amend. See Docket No. 190 (order). After Plaintiffs filed their first 17 amended complaint (“FAC”), Defendants moved to dismiss again. This is the motion currently 18 pending before the Court. Having considered the parties’ briefs as well as the oral argument of 19 counsel, the Court hereby GRANTS Defendants’ motion to dismiss but with leave to amend, as 20 provided for below. 21 I. FACTUAL & PROCEDURAL BACKGROUND 22 Plaintiffs have sued the following entities: 23 (1) Fortress Investment Group LLC and Fortress Credit Co. LLC (“Fortress”); 24 (2) Uniloc 2017 LLC; Uniloc USA, Inc.; and Uniloc Luxembourg S.A.R.L. (“Uniloc”); 25 26 (3) VLSI Technology LLC (“VLSI”); 27 (4) INVT SPE LLC and Inventergy Global, Inc. (“INVT”); 28 (5) IXI IP, LLC (“IXI”); and Dockets.Justia.com Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 2 of 29 (6) 2 Plaintiffs essentially bring antitrust claims against Defendants. There are two basic factual 3 predicates underlying Plaintiffs’ claims: (1) Defendants aggregated patents and then asserted or 4 threatened to assert those patents against Plaintiffs, including through litigation, and (2) third 5 parties transferred standard essential patents to Defendants, which then asserted or threatened to 6 assert those patents against Plaintiffs. The first factual predicate shall hereinafter be referred to as 7 the Patent Aggregation Theory; the second factual predicate shall hereinafter be referred to as the 8 SEP Transfer Theory. Below the Court briefly outlines the allegations in support of each theory. Patent Aggregation Theory 9 United States District Court Northern District of California Seven Networks, LLC (“Seven”).1 1 10 1. General Theory of Liability 11 In their FAC, Plaintiffs allege as follows with respect to the Patent Aggregation Theory. 12 Patent assertion entities (“PAEs”) are companies that “aggressively pursue meritless 13 [patent infringement] litigation.” FAC ¶ 2. In recent years, “PAEs have evolved” by “partnering 14 with investment firms to fuel their litigation.” FAC ¶ 6. Fortress is one such investment firm. See 15 FAC ¶ 8. Fortress owns or controls the PAEs identified in (2)-(6) above. See FAC ¶¶ 9-10. 16 Through the PAEs, Fortress has “aggregate[d] a massive . . . portfolio of patents that purportedly 17 read on high-tech consumer and enterprise electronic devices and components or software therein 18 and processes used to manufacture them.” FAC ¶ 9. The aggregated patents number “well over a 19 thousand.” FAC ¶ 29. Before the patent aggregation by Fortress, the “diffuse” owners of the patents were 20 21 constrained from making patent assertions against others. FAC ¶ 9. For example: 22 A patent owner might not assert a patent because it is “weak” in the sense that the 23 patent is of questionable validity, that there is questionable infringement, and/or 24 that the patent can easily be designed around. See FAC ¶ 34. 25 Also, even if a patent is not substantively weak, a patent owner might not assert the patent because of “competitive constraints.” FAC ¶ 49; see also FAC ¶ 5 26 27 28 1 Apple, but not Intel, has dismissed its claims against Seven. See Docket Nos. 219-20 (stipulation and order). 2 United States District Court Northern District of California Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 3 of 29 1 (indicating that “weak” patents also include “those that never would have been 2 asserted by their former owners, which faced competitive constraints”). “For 3 example, infringement actions by component or software suppliers against 4 customers or potential customers will limit prospects for future sales. Suits by 5 electronic device suppliers against suppliers or potential suppliers of components or 6 software could jeopardize their ability to source essential components or software 7 for their devices. Reputational and relational harm from filing repeated, baseless 8 infringement suits will limit product companies’ ability to participate effectively in 9 collaborative industry initiatives, such as standard setting or other industry 10 endeavors.” FAC ¶ 49 (noting that PAEs are “companies that produce no 11 products” and thus have “different incentives”). 12 Furthermore, even if a patent owner would not be constrained from making patent assertions, the 13 facts above – including but not limited to the fact that there were alternatives to the patent (i.e., 14 substitutes), see FAC ¶ 37 – would still constrain the royalties that the patent owner could 15 demand. See FAC ¶ 9. 16 Fortress’s aggregation scheme, however, changed matters. First, through aggregation, 17 alternative sources of substitute patents were eliminated. See FAC ¶ 37. Aggregation in this 18 regard is akin to a “merger or combination of competitors that lessens competition.” FAC ¶ 40. 19 Second, aggregation “elevate[d] the value of asserting weak patents.” FAC ¶ 38. With a large 20 number of patents, including weak ones, Defendants were able to make “endless patent assertions” 21 23 in order to stretch the resources of their targets and increase the possibility that those weak patents will improperly be found valid and infringed or the prospect that a target (like Intel or Apple) will agree to a license to resolve the threat posed by Fortress and its PAEs. 24 FAC ¶ 10. Through “waves of lawsuits,” Defendants “can deploy patent after patent in case after 25 case against their targets with the threat of ever more patent assertions and ever more litigation.” 26 FAC ¶ 12. Accordingly, “assertion of weak patents as part of a wave of assertions against a target 27 generates economic value even if many of those assertions are defeated in litigation.” FAC ¶ 38. 22 28 3 United States District Court Northern District of California Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 4 of 29 1 2. Product Markets 2 Previously, the Court indicated that Plaintiffs’ general theory of antitrust liability was not 3 inherently implausible. However, the Court held that Plaintiffs failed to state a plausible claim for 4 relief because the product market they identified was vague and overbroad. The product market 5 that Plaintiffs had identified was the “Electronics Patents Market,” which was expansively defined 6 as the market for patents for high-tech consumer and enterprise electronic devices and components 7 or software therein and processes used to manufacture them. See Docket No. 190 (Order at 13- 8 17). 9 In the FAC, Plaintiffs have now defined narrower product markets – 13 in total.2 The 10 products in the 13 markets are all patents. The markets cover patents related to the following 11 technologies/functions: 12 (1) Network-based voice messaging. See FAC ¶ 127 et seq. 13 (2) Remote software updates. See FAC ¶ 154 et seq. 14 (3) Mobile device-to-device communication. See FAC ¶ 178 et seq. 15 (4) Local cache management. See FAC ¶ 211 et seq. 16 (5) Shared memory access. See FAC ¶ 234 et seq. 17 (6) Device authorization. See FAC ¶ 250 et seq. 18 (7) Health monitoring. See FAC ¶ 290 et seq. 19 (8) MOSFET channel fabrication. See FAC ¶ 319 et seq. 20 (9) Digital rights management. See FAC ¶ 339 et seq. 21 (10) Cryptographic algorithms using modular multiplication. See FAC ¶ 360 et 22 seq. 23 (11) DRAM refreshing. See FAC ¶ 367 et seq. 24 (12) Input/output pads. See FAC ¶ 374 et seq. 25 (13) Fingerprint authentication. See FAC ¶ 381 et seq. 26 27 28 2 In their opposition, Plaintiffs repeatedly assert that the 13 markets are “exemplar[s].” Opp’n at 1. Presumably, this is because Plaintiffs take the position that Defendants have “obscured information regarding their patent holdings.” Opp’n at 7. Nevertheless, at this juncture, the Court shall not allow Plaintiffs to claim markets beyond the 13 specified. 4 Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 5 of 29 1 Thus, e.g., for (1) above, Plaintiffs allege that the Network-based Voice Messaging Patents Market 2 consists of a market where Defendants and other patent holders have patents that read on 3 electronic devices that support network-based voice messaging. According to Plaintiffs, 4 Defendants and the other patent holders “compete with one another [in this market] to license their 5 patents to suppliers of such devices and supporting software.” FAC ¶ 128. 6 7 have not yet asserted patents in those markets but claim that there is an “ongoing threat that 8 Defendants will assert such patents.” FAC ¶ 359. 9 10 United States District Court Northern District of California With respect to the product markets in (10)-(13) above, Plaintiffs admit that Defendants 3. Direct Evidence of Anticompetitive Effects In any antitrust claim, a critical issue is whether the defendant’s conduct has or will have 11 anticompetitive effects in a given product market. As the Court noted in its prior order, there can 12 be direct evidence of anticompetitive effects or indirect evidence of anticompetitive effects. 13 “Direct evidence of anticompetitive effects would be proof of actual detrimental effects, such as 14 reduced output, increased prices, or decreased quality in the relevant market.” Ohio v. Am. 15 Express Co., 138 S. Ct. 2274, 2284 (2018) (emphasis added). “Indirect evidence would be proof 16 of market power plus some evidence that the challenged restraint harms competition.” Id. Market 17 power is essentially a surrogate for detrimental effects. See FTC v. Ind. Fed’n of Dentists, 476 18 U.S. 477, 460-61 (1986) (noting such; also stating that “the purpose of the inquiries into market 19 definition and market power is to determine whether an arrangement has the potential for genuine 20 adverse effects on competition”); see also Realcomp II, Ltd. v. FTC, 635 F.3d 815, 827 n.6 (6th 21 Cir. 2011) (noting that courts “have permitted an inference of adverse effects based on a showing 22 of market power and anticompetitive tendencies”). If a plaintiff can make a showing of actual 23 anticompetitive effects, then “[a] full-blown market analysis is not necessary.” Bhan v. NME 24 Hosps., Inc., 929 F.2d 1404, 1413 (9th Cir. 1991). 25 In the instant case, Plaintiffs claim that Defendants’ conduct has resulted in actual 26 anticompetitive effects – in particular, supracompetitive pricing in each of the relevant markets. 27 See FAC ¶ 436 (referring to “inflated licensing royalties – i.e., higher prices”). Below are three 28 representative examples from the FAC. 5 Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 6 of 29 a. 1 According to Plaintiffs, for the Network-based Voice Messaging Patents Market, 2 3 Defendants have aggregated the following patents, which are all substitutes for one another. 4 (1) The ‘252 patent. This patent was originally held by Philips. The patent was 5 assigned several times from one company to another. Uniloc obtained the patent 6 from a company known as Pendragon Wireless. See FAC ¶ 131. 7 (2) The ‘5890, ‘723, ‘622, and ‘433 patents (all in the same patent family). The patents 8 were originally held by Ayalogic. Uniloc obtained the patents from a company 9 known as Empire.3 See FAC ¶¶ 133, 135. Plaintiffs allege that the prior owners of the patents above “never asserted these patents 10 United States District Court Northern District of California Market for Patents Covering Network-based Voice Messaging 11 [against others] because of the competitive constraints they faced.” FAC ¶ 142 (emphasis added). 12 Plaintiffs do not identify what those competitive constraints were, but presumably they could 13 include the competitive constraints described in ¶ 49 of the FAC. Uniloc, however, has not been 14 constrained and has instead filed a number of lawsuits asserting infringement of the patents. See, 15 e.g., FAC ¶¶ 143, 146. According to Plaintiffs, Uniloc has sought supracompetitive royalties for 16 the patents. 17 For example, in a lawsuit that Uniloc brought against Apple, asserting infringement of the 18 ‘252 patent, Uniloc estimated its damages at over $489 million. See FAC ¶ 151. Plaintiffs allege 19 that 20 [t]his damages demand is significantly more than the original owner of the ‘252 patent – Philips – has demanded for other of its patents. 21 22 23 24 25 26 27 28 3 According to Plaintiffs, there are additional patents that are “complements to, and possibly substitutes for,” the above five patents. FAC ¶ 136; see also FAC ¶¶ 137-40 (referring to the ‘744 patent currently owned by Seven and the ‘579 patent originally owned by Huawei and currently owned by INVT). For all 13 product markets, Plaintiffs suggest that they cannot detail all of the patents that have been aggregated because Defendants have obfuscated ownership of patents. See Opp’n at 16 (arguing that “Defendants’ obfuscation – including failing to disclose PAEs’ connections to Fortress – impedes Plaintiffs, without discovery, form specifically identifying all substitute patents that are now controlled by Defendants”). 6 Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 7 of 29 1 2 3 Plaintiffs also allege that Uniloc was able to license the above patents to some companies 4 (companies that Uniloc had sued for infringement but with whom Uniloc ultimately settled), see 5 FAC ¶ 152, but there is no indication as to how much these companies paid for their licenses. 6 Plaintiffs essentially concede such but argue that they cannot be blamed for not having “access to 7 the confidential terms of the settlements.” Opp’n at 6. 8 9 10 11 United States District Court Northern District of California FAC ¶ 151 (emphasis added) [filed under seal]. b. Market for Patents Covering Local Cache Management According to Plaintiffs, for the Local Cache Management Patents Market, Defendants have aggregated the following patents, which are all substitutes for one another. (1) The ‘641 patent. This patent was originally held by Philips. The patent was 12 assigned several times from one company to another. Uniloc obtained the patent 13 from a company named Pendragon Wireless. See FAC ¶ 215. 14 (2) The ‘437 patent. This patent was originally held by ETRI. The patent was 15 assigned several times from one company to another. Uniloc obtained the patent 16 from a company named Pendragon Electronics. See FAC ¶ 217. 17 18 (3) The ‘009 patent. This patent was originally held by Freescale. VLSI obtained the patent from a company named NXP. See FAC ¶ 219. 19 Plaintiffs also assert that there are additional patents that are “complements to, and 20 possibly substitutes for,” the ‘641 and ‘009 patents; this includes the ‘014 patent. FAC ¶ 220; see 21 also FAC ¶¶ 221-24 (referring to the ‘761 patent originally held by Freescale and currently owned 22 by VLSI; the ‘331 patent originally held by NXP and currently owned by VLSI; the ‘014 patent 23 originally held by Freescale and currently owned by VLSI; and the ‘357 patent originally held by 24 Freescale and currently owned by VLSI). 25 Plaintiffs allege that the prior owners of the latter category of patents – i.e., the 26 complement/substitute patents identified above – “never asserted these patents because of the 27 competitive constraints they faced.” FAC ¶ 226 (emphasis added); see also FAC ¶ 232. Plaintiffs 28 do not identify what those competitive constraints were, but presumably they could include the 7 Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 8 of 29 1 competitive constraints described in ¶ 49 of the FAC. Defendants, however, have not been 2 constrained. VLSI, for instance, has filed a number of lawsuits asserting infringement of its 3 patents. See, e.g., FAC ¶ 227. According to Plaintiffs, VLSI has sought supracompetitive 4 royalties for its patents. For example, VLSI brought a lawsuit against Intel, asserting infringement of eight patents, 5 6 including the ‘014 patent. VLSI estimated its damages for the eight patents, including the ‘014 7 patent, at approximately $7.1 billion.4 See FAC ¶¶ 100, 228. Plaintiffs allege that 8 [t]hat amount significantly exceeds what Freescale sought for this very patent. . . . Freescale offered Intel a license for 9 – an offer that would have included the ‘014 patent if Intel had accepted. VLSI’s damages estimate is also significantly more than Freescale has sought for other of its patents containing microprocessor features. Specifically, in December 2014, Intel purchased from Freescale for $3.5 million a total of 29 patent families, including 13 U.S. patents . . . . 10 United States District Court Northern District of California 11 12 13 FAC ¶ 228 (emphasis added) [filed under seal]. 14 Plaintiffs also allege that Uniloc and Seven were able to get some companies to license 15 their patents (including a company that Uniloc had sued for infringement), see FAC ¶ 176, but 16 there is no indication as to what these companies paid for their licenses. Again, Plaintiffs maintain 17 that they cannot be blamed for not having access to confidential information. c. 18 According to Plaintiffs, for the Shared Memory Access Patents Market, Defendants have 19 20 Market for Patents Covering Shared Memory Access aggregated the following patents, which are all substitutes for one another. (1) The ‘687 patent. This patent was originally held by ETRI. The patent was 21 22 assigned several times from one company to another. Uniloc obtained the patent 23 from a company named Phoenicia. See FAC ¶ 238. (2) The ‘850 patent. This patent was originally held by ETRI. The patent was 24 assigned several times from one company to another. Uniloc obtained the patent 25 26 27 28 4 According to Plaintiffs, they asked VLSI permission to disclose the specific damages estimate for alleged infringement of the ‘014 patent (“as well as the financial terms of [the] purchase of the patent from NXP (which had merged with Freescale)”), but VLSI refused to consent. FAC ¶ 228. 8 Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 9 of 29 from a company named Pendragon Electronics. See FAC ¶ 240. 1 2 (3) The ‘983 patent. This patent was originally held by NXP. NXP transferred the patent to VLSI. See FAC ¶ 219. 3 4 5 of the competitive constraints they faced.” FAC ¶ 244; see also FAC ¶ 248. Plaintiffs do not 6 identify what those competitive constraints were, but presumably they could include the 7 competitive constraints described in ¶ 49 of the FAC. Defendants, however, have not been 8 constrained. 9 United States District Court Northern District of California Plaintiffs allege that the prior owners of the patents “never asserted these patents because VLSI, for instance, has filed lawsuits against Intel based on the ‘983 patent and other 10 patents. See FAC ¶ 246. According to Plaintiffs, VLSI has sought supracompetitive royalties for 11 the ‘983 patent. In support of this claim, Plaintiffs allege that 12 [t]he damages estimates VLSI has disclosed publicly in connection with its assertion of other patents obtained from the same prior owner [NXP] against Intel have been exorbitant – as discussed above, VLSI disclosed that it would seek $7.1 billion in a suit against Intel involving eight patents [as well as] billions in a suit against Intel involving five patents. This amount is significantly more than NXP has sought for other of its patents concerning microprocessor features. 13 14 15 16 17 FAC ¶ 247 (going on to provide specific examples of how much NXP offered to sell Intel certain 18 other patents). 19 Plaintiffs maintain that that, even if the above does not clearly establish supracompetitive 20 pricing here, there is other – stronger – evidence to support such, specifically, if one were to 21 compare the relatively low price that VLSI paid to acquire the ‘983 patent to the exorbitant 22 damages VLSI has claimed for Intel’s alleged infringement of the ‘983 patent. According to 23 Plaintiffs, they are privy to this specific information because of the lawsuits that VLSI filed 24 against Intel and would have made specific allegations containing this information in the FAC; 25 however, when Plaintiffs asked VLSI for permission to disclose the information in the instant 26 case, VLSI refused. See FAC ¶ 247. 27 SEP Transfer Theory 28 Although the bulk of Plaintiffs’ FAC focuses on the Patent Aggregation Theory, Apple 9 Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 10 of 29 1 also brings a claim based on independent conduct: the transfer of standard essential patents 2 (“SEPs”) from third parties to Fortress and its PAEs. For this theory, Plaintiffs allege as follows. 3 ETSI is a standard-setting organization (“SSO”) that “produces globally-accepted 4 standards for the telecommunications industry.” FAC ¶ 399. Each cellular standard that ETSI 5 adopts “consists of many different technologies that perform a variety of functions. The 6 technologies that perform each of these functions are essential inputs into the manufacture and 7 supply of products and services that support the standards.” FAC ¶ 410. “The functionality for 8 cellular standards associated with each input technology comprises its own relevant market . . . .” 9 FAC ¶ 414 (referring to the Input Technology Market(s)). ETSI has a policy that “obligates members to disclose to ETSI and its members patents and United States District Court Northern District of California 10 11 patent applications that a member believes are or may become essential to an ETSI standard,”5 12 and, “[o]nce such a disclosure is made, the member is requested to submit an irrevocable 13 undertaking confirming its willingness to license the IPRs [intellectual property rights] it has 14 disclosed on FRAND [fair, reasonable, and nondiscriminatory] terms and conditions.” FAC ¶ 15 402. Implicitly, ETSI has this policy because it recognizes that, “[o]nce a standard, like LTE, is 16 adopted, the viability of using alternative technologies that are not standardized to perform 17 functions included in the standard is constrained or eliminated. That is, standardization constrains 18 or eliminates . . . substitutes.” FAC ¶ 412; see also FAC ¶ 395 (noting that, when a “standard is 19 set and technology to perform a particular functionality is incorporated in the standard, users of the 20 standard become ‘locked in’ to using that technology through their investment in products and 21 services that support the standard,” which “creates a risk that patent holders claiming to have 22 essential patents will attempt to exploit their patents by demanding excessive royalties or seeking 23 to enjoin the use of their patents”). INVT and Uniloc acquired “declared essential SEPs” from Panasonic, Nokia, Huawei, and 24 25 Philips. See FAC ¶¶ 418-422 (identifying specific patents by number). “Transferring SEPs from 26 an operating company that supplies its own products and participates in SSOs to a PAE allows the 27 28 5 Plaintiffs indicate that “SSOs typically make no evaluation of whether a claimed-essential patent is actually essential.” FAC ¶ 396. 10 Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 11 of 29 1 PAE to escape the protections for licensees to which licensors agree through making a FRAND 2 commitment.” FAC ¶ 423. “Simply by asserting that they have large portfolios of essential 3 patents, INVT and Uniloc . . . can obtain royalties or other licensing terms for the patents above 4 what they could have obtained before ETSI . . . standardized the technology that INVT and Uniloc 5 . . . claims is covered by their patents.” FAC ¶ 417 (emphasis added); FAC ¶ 429 (referring to 6 “asserted SEPs held by INVT and Uniloc [that] claim to cover essential technology”) (emphasis 7 added). In their opposition brief, Plaintiffs state that they wish to amend their complaint to make 8 United States District Court Northern District of California 9 additional factual allegations in support of the SEP Transfer Theory. See Opp’n at 9 (asserting 10 that, in August 2020, shortly after the FAC was filed, VoiceAge EVS – a company affiliated with 11 Fortress – sued Apple, “asserting five patents claimed to be essential to the EVS codec in the LTE 12 cellular standard and subject to FRAND commitments”). 13 Causes of Action 14 Based on, inter alia, the above allegations, Plaintiffs have asserted the following causes of 15 action. 16 (1) Violation of § 1 of the Sherman Act (against Fortress, Uniloc, INVT, and IXI). 17 Under § 1, “[e]very contract, combination in the form of trust of otherwise, or 18 conspiracy, in restraint of trade or commerce among the several States, or with 19 foreign nations, is declared to be illegal.” 15 U.S.C. § 1. Here, Plaintiffs’ § 1 20 claim puts forward a Patent Aggregation Theory only. According to Plaintiffs, 21 Fortress and each relevant PAE entered into a bilateral agreement “to aggregate 22 patents under Fortress’s control” and to use the aggregation to extract higher 23 royalties.6 FAC ¶ 440. 24 25 26 27 28 6 In their opposition, Plaintiffs clarified that they are asserting only bilateral conspiracies between each PAE and Fortress (i.e., not an overarching conspiracy involving all Defendants). However, the precise scope and nature of the bilateral conspiracies is still somewhat ill-defined. For example, are Plaintiffs claiming that each PAE worked with Fortress to aggregate the patents the PAE has? Or is that that PAE knew Fortress would aggregate the PAE’s patents with another PAE’s patents in the same market (i.e., the PAE was just contributing to Fortress’s “pot of patents,” so to speak)? Or is it both? Whether antitrust injury is adequately alleged may turn in part on the nature of the asserted conspiracies. 11 Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 12 of 29 United States District Court Northern District of California 1 (2) Violation of § 7 of the Clayton Act (against Fortress, Uniloc, VLSI, INVT, IXI, 2 and Seven). Under § 7, “no person subject to the jurisdiction of the Federal Trade 3 Commission shall acquire the whole or any part of the assets of another person also 4 engaged in commerce or in any activity affecting commerce, where in any line of 5 commerce or in any activity affecting commerce in any section of the country, the 6 effect of such acquisition may be substantially to lessen competition, or to tend to 7 create a monopoly.” 15 U.S.C. § 18; see also St. Alphonsus Med. Ctr.-Nampa, Inc. v. 8 Saint Luke's Health Sys., 778 F.3d 775, 783, 785 (9th Cir. 2015) (noting that “‘§ 7 was 9 intended to arrest anticompetitive tendencies in their incipiency’”; e.g., “[a] prima facie 10 case can be established simply by showing high market share”). Here, Plaintiffs’ § 7 11 claim also asserts a Patent Aggregation Theory only. According to Plaintiffs, Fortress 12 and each relevant PAE have acquired patents, and the effect of the aggregation has 13 been “to lessen competition substantially, and to tend to create market power.” FAC ¶ 14 445. 15 (3) Unfair competition in violation of California Business & Professions Code § 17200 16 (against all Defendants). This claim is derivative of the two federal antitrust claims 17 above. See FAC ¶ 450 (alleging that “Defendants have engaged in illegal conduct by 18 violating the Sherman and Clayton Acts”; also alleging that the conduct “is . . . unfair 19 in that it violates the spirit and policy of the antitrust laws”). 20 (4) Unfair competition in violation of § 17200 (against Fortress, Uniloc, and INVT). 21 This claim is brought by Apple only and is based on the SEP Transfer Theory. 22 According to Apple, SEPs have been transferred as a means of trying to get around 23 FRAND commitments. Plaintiffs allege that the relevant Defendants’ conduct 24 “violates Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45” and “is also 25 unfair in that it violates the spirit and policy of the antitrust laws.” FAC ¶ 454; see also 26 FAC ¶ 457 (alleging that “[t]he FTC has brought an action under Section 5 where, like 27 here, an acquiring firm refused to abide by licensing commitments that its predecessor 28 made in connection with industry standard-setting activities”). This claim is not 12 Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 13 of 29 1 predicated on aggregation of patents. United States District Court Northern District of California 2 II. DISCUSSION 3 Legal Standard 4 Federal Rule of Civil Procedure 8(a)(2) requires a complaint to include “a short and plain 5 statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). A 6 complaint that fails to meet this standard may be dismissed pursuant to Federal Rule of Civil 7 Procedure 12(b)(6). See Fed. R. Civ. P. 12(b)(6). To overcome a Rule 12(b)(6) motion to dismiss 8 after the Supreme Court’s decisions in Ashcroft v. Iqbal, 556 U.S. 662 (2009), and Bell Atlantic 9 Corp. v. Twombly, 550 U.S. 544 (2007), a plaintiff’s “factual allegations [in the complaint] ‘must 10 . . . suggest that the claim has at least a plausible chance of success.’” Levitt v. Yelp! Inc., 765 11 F.3d 1123, 1135 (9th Cir. 2014). The court “accept[s] factual allegations in the complaint as true 12 and construe[s] the pleadings in the light most favorable to the nonmoving party.” Manzarek v. St. 13 Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). But “allegations in a 14 complaint . . . may not simply recite the elements of a cause of action [and] must contain sufficient 15 allegations of underlying facts to give fair notice and to enable the opposing party to defend itself 16 effectively.” Levitt, 765 F.3d at 1135 (internal quotation marks omitted). “A claim has facial 17 plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable 18 inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. “The 19 plausibility standard is not akin to a probability requirement, but it asks for more than a sheer 20 possibility that a defendant has acted unlawfully.” Id. (internal quotation marks omitted). 21 Counts One Through Three: Product Markets 22 Plaintiffs’ first three claims are all antitrust claims: a Sherman Act § 1 claim, a Clayton Act 23 § 7 claim, and a derivative § 17200 claim. They are all based on the Patent Aggregation Theory. 24 Plaintiffs claim that Defendants’ patent aggregation and patent assertion have had anticompetitive 25 effects and thus violate antitrust law. 26 As the Court noted in its prior order, in order to assess whether Defendants’ conduct has 27 had anticompetitive effects, it must first have an understanding of what the relevant market is. See 28 Docket No. 190 (Order at 11-12); see also FTC v. Qualcomm Inc., 969 F.3d 974, 992 (9th Cir. 13 United States District Court Northern District of California Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 14 of 29 1 2020) (stating that “[a] threshold step in any antitrust case is to accurately define the relevant 2 market, which refers to ‘the area of effective competition’”; without a definition of the market, 3 “there is no way to measure [the defendant’s] ability to lessen or destroy competition”) (internal 4 quotation marks omitted); R.D. Imps. Ryno Indus., Inc. v. Mazda Distribs. (Gulf), Inc., 807 F.2d 5 1222, 1224 (5th Cir. 1987) (in a § 1 case, noting that “[m]arket considerations provide the 6 objective benchmark for the measurement of competitive impact[;] [t]here can thus be no rational 7 ascertainment of competitive injury without first defining the relevant market”); cf. Walker 8 Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 177 (1965) (stating that, for a 9 Sherman Act § 2 claim, a market definition is necessary as, without such, “there is no way to 10 measure [a defendant’s] ability to lessen or destroy competition”). What the relevant market is 11 generally a factual question rather than a legal one. See Newcal Indus. v. Ikon Office Sol., 513 12 F.3d 1038, 1045 (9th Cir. 2008). 13 14 As noted above, Plaintiffs have identified 13 product markets. The products in the 13 markets are all patents – specifically, patents that relate to the following technologies/functions: 15 (1) Network-based voice messaging. See FAC ¶ 127 et seq. 16 (2) Remote software updates. See FAC ¶ 154 et seq. 17 (3) Mobile device-to-device communication. See FAC ¶ 178 et seq. 18 (4) Local cache management. See FAC ¶ 211 et seq. 19 (5) Shared memory access. See FAC ¶ 234 et seq. 20 (6) Device authorization. See FAC ¶ 250 et seq. 21 (7) Health monitoring. See FAC ¶ 290 et seq. 22 (8) MOSFET channel fabrication. See FAC ¶ 319 et seq. 23 (9) Digital rights management. See FAC ¶ 339 et seq. 24 (10) Cryptographic algorithms using modular multiplication. See FAC ¶ 360 et 25 seq. 26 (11) DRAM refreshing. See FAC ¶ 367 et seq. 27 (12) Input/output pads. See FAC ¶ 374 et seq. 28 (13) Fingerprint authentication. See FAC ¶ 381 et seq. 14 United States District Court Northern District of California Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 15 of 29 1 1. 2 As an initial matter, the Court considers the product markets in (10)-(13). Plaintiffs admit 3 that Defendants have not yet asserted patents in those markets but claim that there is an “ongoing 4 threat that Defendants will assert such patents.” FAC ¶ 359. However, Plaintiffs have not made 5 allegations explaining why there is a threat that Defendants will assert those patents – and against 6 Plaintiffs specifically. Absent further allegations, Plaintiffs have not adequately established 7 standing to assert antitrust claims based on those product markets. See In re Zappos.com, Inc., 8 888 F.3d 1020, 1024 (9th Cir. 2018) (noting that, to have Article III standing, a plaintiff must 9 show, inter alia, an injury in fact that is “‘concrete and particularized and (b) actual or imminent, 10 not conjectural or hypothetical’”; “[a] plaintiff threatened with future injury has standing to sue ‘if 11 the threatened injury is “certainly impending,” or there is a “substantial risk that the harm will 12 occur”’”); cf. Asia Vital Components Co. v. Asetek Danmark A/S, 837 F.3d 1249, 1253 (Fed. Cir. 13 2016) (in addressing whether there was subject matter jurisdiction over a declaratory judgment 14 suit seeking a declaration of no patent infringement and patent invalidity, stating that “‘jurisdiction 15 generally will not arise merely on the basis that a party learns of the existence of a patent owned 16 by another or even perceives such a patent to pose a risk of infringement, without some 17 affirmative act by the patentee’”; there must be “‘conduct that can be reasonably inferred as 18 demonstrating intent to enforce a patent’”). 19 Product Markets (10)-(13) The Court therefore dismisses all antitrust claims based on the product markets identified 20 in (10)-(13). The Court dismisses with prejudice as Plaintiffs have provided no indication that 21 they are capable of curing this deficiency on standing. This ruling, however, does not bar 22 Plaintiffs from initiating a new suit (including but not limited to a suit for declaratory relief) 23 should circumstances change. 24 2. Product Markets (1)-(9) 25 As noted above, whether a defendant’s conduct has had anticompetitive effects depends on 26 what the product market is. A product market “encompass[es] the product at issue as well as all 27 economic substitutes for the product.” Newcal, 513 F.3d at 1045. “‘The outer boundaries of a 28 product market are determined by the reasonable interchangeability of use or the cross-elasticity of 15 United States District Court Northern District of California Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 16 of 29 1 demand between the product itself and substitutes for it.’” Id. In the instant case, the product 2 markets are arguably better characterized as patent markets or technology markets. See DOJ & 3 FTC, Antitrust Guidelines for the Licensing of Intellectual Property § 3.2.2 (Jan. 12, 2017) 4 (“Technology markets consist of the intellectual property that is licensed . . . and its close 5 substitutes – that is, the technologies or goods that are close enough substitutes to constrain 6 significantly the exercise of market power with respect to the intellectual property that is 7 licensed.”), available at 8 https://www.ftc.gov/system/files/documents/public_statements/1049793/ip_guidelines_2017.pdf 9 (last visited 11/13/2020); see also Hynix Semiconductor Inc. v. Rambus Inc., No. CV-00-20905 10 RMW, 2008 U.S. Dist. LEXIS 123822, at *14-15 (N.D. Cal. Jan. 5, 2008) (“Traditional antitrust 11 theory focuses on product or goods markets. . . . Defining a technology market, as opposed to a 12 product market, makes sense where ‘rights to intellectual property are marketed separately from 13 the products in which they are used.’”). According to Plaintiffs, each market consists of certain 14 patents held by Defendants and substitutes for those patents; substitutes are other patents that 15 provide the same function that Defendants’ patents do. See Opp’n at 10 (asserting that the “patent 16 markets [are] based on discrete technologies in which Defendants have aggregated patents 17 covering technologies that compete to perform a particular function included in electronic 18 devices.”). 19 In their motion to dismiss, Defendants argue that Plaintiffs have failed to adequately plead 20 product markets. Although “market definition is a deeply fact-intensive inquiry, [and] courts 21 hesitate to grant motions to dismiss for failure to plead a relevant product market,” Todd v. Exxon 22 Corp., 275 F.3d 191, 200 (2d Cir. 2001), a product market must still be plausible. See Chapman v. 23 N.Y. State Div. for Youth, 546 F.3d 230, 237-38 (2d Cir. 2008). Here, the Court concludes that 24 many, although not all, of the markets claimed by Plaintiffs are not plausibly stated because, 25 facially, they are still overbroad. Admittedly, Plaintiffs have provided more specificity in their 26 FAC compared to their original complaint. See Docket No. 190 (Order at 13-17) (noting that, in 27 the original complaint, Plaintiffs asserted as the relevant product market the “Electronics Patents 28 Market,” which was expansively defined as the market for patents for high-tech consumer and 16 Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 17 of 29 1 enterprise electronic devices and components or software therein and processes used to 2 manufacture them”). Nevertheless, the narrowing is, in most cases, insufficient. The Court 3 addresses each of the product markets below. United States District Court Northern District of California 4 (1) Network-based voice messaging. For purposes of Rule 12(b)(6), the Court finds this 5 product market sufficiently pled because Plaintiffs have not claimed that the market is 6 network-based voice messaging – a broad technical field – but rather narrowed the 7 market to a specific function within that field, i.e., “techniques to enable multiple 8 recipients to access a voice message.” FAC ¶ 129; see also FAC ¶ 127 (alleging that 9 “[n]etwork-based voice messaging allows for multiple recipients to access the same 10 voice message”); FAC ¶ 141 (alleging that “the ‘252 patent and the ‘5890 patent each 11 purport to cover techniques that enable multiple recipients to access a shared voice 12 message” – “the ’252 describes a recipient-driven method in which the shared voice 13 message is posted to a communal message board where recipients can access the 14 message” while the ’5890 patent describes a sender-driven method in which the sender 15 selects the recipients and the message is delivered to the selected recipients”). 16 (2) Remote software updates. For purposes of Rule 12(b)(6), the Court finds this product 17 market sufficiently pled because Plaintiffs have not claimed that the market is remote 18 software updates but rather narrowed the market to “techniques for identifying devices 19 that are eligible for remote software updates.” FAC ¶ 154; see also FAC ¶ 165 20 (alleging that “the ‘852 patent covers a method of providing software updates where a 21 ‘device identifier’ is used to determine eligibility for an update” and that “the ‘088 22 patent covers a method of providing software updates in which a list of acceptable and 23 unacceptable configurations is used to determine eligibility for an update”). 24 (3) Mobile device-to-device communication. The Court finds this product market facially 25 overbroad and therefore, even at the 12(b)(6) phase, implausible. As Defendants 26 contend, here, Plaintiffs have effectively asserted as the product market a general 27 technical field. See FAC ¶ 178 (“Mobile device-to-device communication techniques 28 enable two or more mobile devices to communicate over a network efficiently and 17 Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 18 of 29 1 securely.”). Plaintiffs suggest they have pinpointed a specific function within the field, 2 but that claimed function – means for mobile devices to communicate – is ultimately 3 no different from the general technical field itself. 4 5 therefore, even at the 12(b)(6) phase, implausible. Although Plaintiffs have framed the 6 market as techniques to “improv[e] local cache performance,” FAC ¶ 225, that is 7 ultimately no different from the general technical field of local cache management. See 8 FAC ¶ 211 (“Local cache management enables computer processors to store and 9 retrieve information more efficiently.”). 10 United States District Court Northern District of California (4) Local cache management. The Court finds this product market facially overbroad and (5) Shared memory access. The Court finds this product market facially overbroad and 11 therefore, even at the 12(b)(6) phase, implausible. As above, Plaintiffs have asserted as 12 the product market a general technical field – not any specific function within that 13 field. See FAC ¶ 234 (“Shared memory access techniques provide a way for electronic 14 devices or components thereof in which memory is shared by multiple processors to 15 handle requests to access that share memory.”). 16 (6) Device authorization. The Court finds this product market facially overbroad and 17 therefore, even at the 12(b)(6) phase, implausible. Again, Plaintiffs have asserted as 18 the product market a general technical field – not any specific function within that 19 field. See FAC ¶ 250 (“Device authorization is a means to restrict access in a computer 20 network to only authorized, trusted devices. Device authorization is commonly used in 21 computer networks to protect data integrity and security . . . .”). 22 (7) Health monitoring. The Court finds this product market facially overbroad and 23 therefore, even at the 12(b)(6) phase, implausible. As above, Plaintiffs have asserted as 24 the product market a general technical field – not any specific function within that 25 field. See FAC ¶ 290 (“Health monitoring enables certain electronic devices, such as 26 wearable devices, smartphones, medical devices, or the like, to monitor and process 27 patient data from sensors.”). 28 (8) MOSFET channel fabrication. For purposes of Rule 12(b)(6), the Court finds this 18 Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 19 of 29 1 product market sufficiently pled because MOSFET channel fabrication does not, as a 2 facial matter, appear to be a general technical field. See FAC ¶ 319 (“This corresponds 3 to a part of the semiconductor fabrication process in which nanoscale MOSFET 4 channels are formed on a semiconductor substrate. Modern digital processors include 5 millions or billions of integrated MOSFET devices per chip, each of which includes a 6 respective channel.”). United States District Court Northern District of California 7 (9) Digital rights management. The Court finds this product market facially overbroad and 8 therefore, even at the 12(b)(6) phase, implausible. As Defendants assert, here, 9 Plaintiffs have asserted as the product market a general technical field – not any 10 specific function within that field. See FAC ¶ 339 (“Digital rights management 11 provides a way to protect digital files (e.g., digital media, software, video games, and 12 the like) from unauthorized use. Techniques directed to digital rights management 13 enable a content distributor to enforce software licenses and restrict a user’s ability to 14 access and copy the digital files.”). 15 16 Accordingly, for most of the product markets in (1)-(9) above, the Court finds a fundamental deficiency and therefore grants the motion to dismiss. 17 Counts One Through Three: Market Power 18 Even if all of the products markets in (1)-(9) were adequately pled, there is another 19 fundamental problem with Plaintiffs’ FAC; specifically, there are inadequate allegations that 20 Defendants have market power in each of the product markets. 21 “Market power . . . is simply a way to assess whether the defendant's conduct has 22 anticompetitive effects.” Staley v. Gilead Scis., Inc., 446 F. Supp. 3d 578, 616 (N.D. Cal. 2020) 23 (Chen, J.); see also In re Aggrenox Antitrust Litig., 199 F. Supp. 3d 662, 668 (D. Conn. 2016) 24 (stating that "articulating a relevant market definition is not an end in itself, but is in the service of 25 answering the question of market power, which in turn 'is but a surrogate for detrimental effects'"). 26 For most of the product markets, Plaintiffs have identified fewer than ten patents held by the 27 relevant defendants. Without having an understanding of how many patents there are in a given 28 product market, it is difficult to say that the relevant defendants’ possession of their patents 19 Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 20 of 29 1 constitutes market power – even more so when taking into account that Plaintiffs have claimed, as 2 a facial matter, product markets that are relatively broad in scope. 3 In their papers, Plaintiffs argue that they would only need to show market power if they 4 were relying on indirect evidence of anticompetitive effects. As the Court noted in its prior order, 5 anticompetitive effects in a market may be shown through direct evidence or indirect evidence. 6 “Direct evidence of anticompetitive effects would be proof of actual detrimental effects [on competition], such as reduced output, increased prices, or decreased quality in the relevant market.” Id. at 2284; see also Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1434 (9th Cir. 1995) (noting that “[a] predator has sufficient market power when, by restricting its own output, it can restrict marketwide output and, hence, increase marketwide prices[;] [p]rices increase marketwide in response to the reduced output because consumers bid more in competing against one another to obtain the smaller quantity available”). In contrast, “[i]ndirect evidence would be proof of market power plus some evidence that the challenged restraint harms competition.” Am. Express, 138 S. Ct. at 2284. 7 8 9 10 United States District Court Northern District of California 11 12 13 Docket No. 190 (Order at 12). A lesser market analysis is permissible where there is proof of 14 actual detrimental effects. Plaintiffs argue that they have made allegations of actual detrimental 15 effects (i.e., there is direct evidence of anticompetitive effects), and therefore they need not 16 provide information about, e.g., market share. 17 1. Section 1 v. Section 7 18 As an initial matter, the Court considers whether the § 1 and § 7 claims should be subject 19 to the same analysis. According to Defendants, the direct/indirect evidence analysis applies to the 20 § 1 claim only: “A Clayton Section 7 claim always requires a relevant antitrust market, and the 21 degree of pleading required does not change by purporting to assert ‘direct evidence’ of market 22 power.” Mot. at 18. 23 Defendants are correct in noting that the direct/indirect evidence analysis appears in § 1 24 cases. However, that does not mean that the analysis would never be appropriate in a § 7 case. 25 Admittedly, for a typical § 7 case, a plaintiff does not resort to direct evidence of 26 anticompetitive effects because a § 7 claim is viable simply where there is an appreciable danger 27 of anticompetitive effects. See 15 U.S.C. § 18 (providing that “no person subject to the 28 jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of 20 United States District Court Northern District of California Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 21 of 29 1 another person also engaged in commerce or in any activity affecting commerce, where in any line 2 of commerce or in any activity affecting commerce in any section of the country, the effect of such 3 acquisition may be substantially to lessen competition, or to tend to create a monopoly”); see also 4 St. Alphonsus, 778 F.3d at 788 (noting that “‘Section 7 does not require proof that a merger or 5 other acquisition has caused higher prices in the affected market[;] [a]ll that is necessary is that the 6 merger create an appreciable danger of such consequences in the future’”) (emphasis added). To 7 show an appreciable danger of anticompetitive effects, a § 7 plaintiff can usually rely on indirect 8 evidence such as high market share. See id. at 785 (noting that “[a] prima facie case [for a § 7 9 violation] can be established simply by showing high market share,” but adding that “plaintiffs in 10 § 7 cases generally present other evidence as part of the prima facie case” because statistics 11 concerning market share and concentration are not conclusive indicators of anticompetitive 12 effects). 13 But in the instant case, Plaintiffs’ § 7 claim is that there are in fact anticompetitive effects 14 – and not just an appreciable danger of such. That being the case, if there is proof of actual 15 detrimental effects, then there is arguably no need for the more rigorous market analysis used 16 when only indirect evidence is at issue. Defendants contend still that four Supreme Court Justices 17 in American Express indicated that “a direct evidence theory . . . is not viable for Section 7 18 claims,” Reply at 21 (emphasis in original), but the language they cite from American Express is 19 not clearly dispositive. See Am. Express, 138 S. Ct. at 2291 (Breyer, J., dissenting) (“It is 20 important here to understand that in cases under § 1 of the Sherman Act (unlike in cases 21 challenging a merger under § 7 of the Clayton Act), it may well be unnecessary to undertake a 22 sometimes complex, market power inquiry.”). 23 For purposes of this order, however, the Court need not definitively rule on this issue and 24 instead assumes – in Plaintiffs’ favor – that Plaintiffs’ § 7 claims are subject to the same 25 direct/indirect evidence analysis that applies in § 1 claims. As discussed below, even with this 26 assumption – and others – Plaintiffs’ antitrust claims fail. 27 2. Direct Evidence of Anticompetitive Effects 28 Because Plaintiffs are focusing on direct evidence of anticompetitive effects, the next 21 United States District Court Northern District of California Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 22 of 29 1 question is what constitutes sufficient proof of actual anticompetitive effects. The parties dispute 2 whether supracompetitive pricing alone is sufficient to show anticompetitive effects (Plaintiffs’ 3 position), or whether a plaintiff must show both supracompetitive pricing and restricted output 4 (Defendants’ position). The Supreme Court has not clearly addressed this issue. In American 5 Express, the Court noted that, if “‘output is expanding at the same time prices are increasing, 6 rising prices are equally consistent with growing product demand,’” but, at another point, the 7 Court used the disjunctive, stating “[t]his Court will ‘not infer competitive injury from price and 8 output data absent some evidence that tends to prove that output was restricted or prices were 9 above a competitive level.’” Id. at 2284, 2288 (emphasis added). And although the Ninth Circuit 10 has stated that “[e]vidence of restricted output and supracompetitive prices is direct evidence of 11 market power,” Theme Promotions, Inc. v. News America Marketing FSI, 546 F.3d 991, 1001 (9th 12 Cir. 2008) (added); see also Rebel Oil v. Atl. Richfield Co., 51 F.3d 1421, 1434 (9th Cir. 1995) 13 (stating that, “[i]f the plaintiff puts forth evidence of restricted output and supracompetitive prices, 14 that is direct proof of the injury to competition which a competitor with market power may inflict, 15 and thus, of the actual exercise of market power”), the Ninth Circuit has not provided its take on 16 the statements above in American Express; nor has it expressly addressed the question whether 17 supracompetitive pricing alone can establish market power. Compare also In re Aggrenox 18 Antitrust Litig., 94 F. Supp. 3d 224, 246 (D. Conn. 2015) (stating that, “when direct evidence is 19 available that a party profitably charges supracompetitive prices, the existence of market power 20 can be established from that fact alone” – implicitly because charging supracompetitive prices 21 reflects “‘the power to control prices or exclude competition’”), with Harrison Aire, Inc. v. 22 Aerostar Int’l, 423 F.3d 374, 381 (3d Cir. 2005) (noting that “[c]ompetitive markets are 23 characterized by both price and quality competition, and a firm's comparatively high price may 24 simply reflect a superior product”), and Safeway Inc. v. Abbott Labs., 761 F. Supp. 2d 874, 887 25 (N.D. Cal. 2011) (Wilken, J.) (stating that “supracompetitive pricing, on its own, is not direct 26 evidence of monopoly power[;] [t]o prove monopoly power directly, supracompetitive pricing 27 must be accompanied by restricted output”). 28 For purposes of this order, the Court assumes arguendo that supracompetitive pricing by 22 Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 23 of 29 1 itself is enough to establish anticompetitive effects.7 But, even with this assumption, Plaintiffs’ 2 antitrust claims still fail. 3 3. 4 The allegations in Plaintiffs’ FAC arguably suggest that supracompetitive pricing is 5 possible; however, Twombly and Iqbal require plausibility and not just possibility. The 6 plausibility threshold has not been met in the instant case. Because Plaintiffs’ allegations on 7 supracompetitive pricing are largely the same regardless of the product market at issue, the Court 8 focuses first on the Network-based Voice Messaging Patents Market as a representative example. 9 According to Plaintiffs, for the Network-based Voice Messaging Patents Market, 10 United States District Court Northern District of California Supracompetitive Pricing Defendants have aggregated the following patents, which are all substitutes for one another. 11 (1) The ‘252 patent. This patent was originally held by Philips, then was assigned 12 several times before Uniloc obtained the patent from a company known as 13 Pendragon Wireless. See FAC ¶ 131. 14 (2) The ‘5890, ‘723, ‘622, and ‘433 patents (all in the same patent family). The patents 15 were originally held by Ayalogic, and Uniloc ultimately obtained the patents from a 16 company known as Empire. See FAC ¶¶ 133, 135. Plaintiffs allege that the prior owners of the patents above “never asserted these patents 17 18 [i.e., against others] because of the competitive constraints they faced.” FAC ¶ 142. Uniloc, 19 however, has not been constrained and has instead filed a number of lawsuits asserting 20 infringement of the patents. See, e.g., FAC ¶¶ 143, 146. According to Plaintiffs, Uniloc has 21 sought supracompetitive royalties for the patents. For example, in a lawsuit that Uniloc brought against Apple, asserting infringement of the 22 23 24 25 26 27 28 7 At the hearing, Plaintiffs seemed to admit that their allegations in the FAC of restricted output were largely conclusory. See, e.g., FAC ¶ 141 (simply referring to “inflated royalties and decreased licensing output” without providing more information on how licensing output has decreased). Plaintiffs suggested, however, that there was restricted output because, through aggregation of patents, Defendants eliminated substitutes. The Court has concerns about this theory. Even if Defendants’ aggregation eliminated substitutes, see FAC ¶ 165 (alleging that, “because of Defendants’ unlawful aggregation of patent rights, Defendants now control both substitute technologies, making such competition impossible”), that does not necessarily mean that there was less licensing post-aggregation. For example, a given defendant could have extended a license on a patent plus a license for all of the substitutes for that patent. 23 Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 24 of 29 1 ‘252 patent, Uniloc estimated its damages at over $489 million. See FAC ¶ 151. Plaintiffs allege 2 that 3 4 [t]his damages demand is significantly more than the original owner of the ‘252 patent – Philips – has demanded for other of its patents. 5 6 7 8 9 10 United States District Court Northern District of California 11 FAC ¶ 151 (emphasis added) [filed under seal]. Plaintiffs add that Uniloc was able to license its patents to some companies (companies that Uniloc had sued for infringement but with whom Uniloc ultimately settled), see FAC ¶ 152, but there is no indication as to how much these companies paid for their licenses. Plaintiffs have not plausibly shown that Defendants extracted supracompetitive royalties as 12 a result of their aggregation. There are several shortcomings with Plaintiffs’ allegations. First, 13 although Plaintiffs assert that companies who licensed the above patents from Uniloc paid 14 supracompetitive prices, that is a conclusory allegation. Plaintiffs have provided no information 15 about, e.g., what these companies paid as part of their settlements with Uniloc. While Plaintiffs 16 express frustration in their inability to access more specifics because the settlements between 17 Uniloc and those companies are confidential, that does not exempt them from the specificity 18 requirements of Twombly and Iqbal. 19 Second, although Plaintiffs suggest that the royalties were supracompetitive because prior 20 owners did not even assert the patents in the first place, that does not mean that the patents were 21 worthless. The FAC alleges that prior owners had competitive constraints that kept them from 22 asserting the patents, see FAC ¶ 49, thus indicating their market value could have been substantial 23 but not asserted or exploited by the prior owners. 24 Third, what prior owners charged as royalties for other patents in the same field (i.e., 25 patents different from the patents which are asserted herein as the basis of market power) is 26 immaterial absent some indication that those other patents are fair comparators for the patents at 27 issue in this case. Cf. Qualcomm, 969 F.3d at 999 (criticizing district court for “assum[ing] that 28 royalties are ‘anticompetitive’ – in the antitrust sense – unless they precisely reflect a patent’s 24 Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 25 of 29 1 current, intrinsic value and are in line with the rates other companies charge for their own patent 2 portfolios”). 3 Fourth, what Uniloc has demanded in litigation – even if extremely high – with respect to 4 the ‘252 patent or any of the other patents is of limited probative value. A litigation demand may 5 have some nexus to reasonable royalties if rationally based, but it is still only a demand; there is 6 no indication that anyone has paid that demand or anything close to it. Fifth, in this instance at least, it is noteworthy that four of the five patents at issue were United States District Court Northern District of California 7 8 already held by one owner. The only aggregation by Defendants was to add the ‘252 patent to the 9 portfolio. The FAC does not explain why the addition of this one patent vastly improves the 10 market power of the portfolio. In other words, it is not obvious that supracompetitive royalties, if 11 any, were based on the aggregation, the anti-competitive practice challenged herein. Finally, and perhaps most fundamentally, even though Plaintiffs allege the five patents are 12 13 substitutes and thus limit the options of technology companies in developing products, the FAC 14 does not allege how many other substitute patents are available. The Court has no idea whether 15 these five patents represent the “crown jewels” of the field or just a small portion of a large field 16 of substitutes. The ability to extract a supracompetitive royalty is easier to infer if Defendants 17 held the crown jewels, but no such allegation is made in the FAC.8 The above deficiencies apply to the majority of the product markets in (1)-(9). To be sure, 18 19 Plaintiffs’ allegations are slightly stronger where they have alleged a prior owner offered to sell a 20 portfolio containing a patent at issue for far less than the current demand in litigation which 21 ensued after aggregation. For example, for the Local Cache Management Patents Market, 22 Plaintiffs were able to provide an example where they were able to compare a specific demand 23 from a prior patent owner and a specific demand made by a defendant in this case. According to 24 Plaintiffs, the prior owner of the ‘014 patent – 25 26 27 28 8 The Court acknowledges that Plaintiffs are not relying on indirect evidence of anticompetitive effects, for which they would have to show high market share (e.g., that Defendants owned a significant number of patents in the relevant product market). That does not mean, however, that information about the number of patents Defendants hold, or the “quality” of those patents, is insignificant where Plaintiffs are relying on a direct evidence theory. Plaintiffs must still show that the supracompetitive pricing is due to the aggregation of patent substitutes. 25 Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 26 of 29 1 FAC ¶ 228 (emphasis 2 3 added) [filed under seal]. After VLSI obtained the ‘014 patent (and other patents) from 4 Freescale, it brought suit against Intel, asserting infringement of eight patents, one of which was 5 the ‘014 patent. VLSI estimated its damages for the eight patents, including the ‘014 patent, at 6 approximately $7.1 billion. See FAC ¶¶ 100, 228. Plaintiffs essentially take the position that VLSI 7 has engaged in supracompetitive pricing given that its litigation demand vastly exceeds the 8 demand made by the prior owner. But even this example is not enough to show that VLSI engaged in supracompetitive United States District Court Northern District of California 9 10 pricing. First, demands, as noted above, are simply demands; as such, by themselves, they have 11 some, but limited, probative value. Second, the comparison is, as a facial matter, not a fair one: 12 Plaintiffs are comparing a demand made for one group of patents with a later demand made for a 13 different group of patents; the only overlap between the two groups appears to be the ‘014 patent. 14 There is no allegation attributing the value of the ‘014 to the prior offered portfolio or to the later 15 portfolio asserted against Intel. Thus, it is not clear whether other patents in the respective 16 portfolios could account for the difference in the asserted values of the portfolios. Third, even if it 17 could reasonably be inferred that the ‘014 patent was the driving force for the increase in demand, 18 there must still be a showing that the supracompetitive pricing was the result of the ‘014 patent’s 19 being aggregated with patents that provide the same function. The FAC lacks specific allegations 20 in this regard. A similar problem infects Plaintiffs’ allegations for, e.g., the Shared Memory Access 21 22 Patents Market. There, Plaintiffs have indicated that supracompetitive pricing can be inferred if 23 one were to compare the relatively low price that VLSI paid to acquire the ‘983 patent compared 24 to the exorbitant damages VLSI has claimed for Intel’s alleged infringement of the ‘983 patent. 25 But even assuming this is true,9 the differential must plausibly be attributable to the aggregation of 26 27 28 9 The Court does not condone Plaintiffs’ failure to provide this information to the Court. Plaintiffs could have, but did not, asked the courts presiding over the VLSI infringement suits against Intel for relief from the protective order so that they could make a filing under seal in this case. 26 United States District Court Northern District of California Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 27 of 29 1 patent substitutes acquired by Defendants. Plaintiffs have failed to make allegations tying the 2 pricing differential to aggregation of the patents at issue. 3 Accordingly, the Court finds that the antitrust claims as pled for product markets (1)-(9) 4 are deficient because Plaintiffs have failed to adequately allege that there was supracompetitive 5 pricing and/or that such pricing was attributable to the aggregation of patent substitutes.10 6 Count Four: Apple’s § 17200 Claim Based on SEP Transfer Theory 7 The remaining claim pled in the FAC is Apple’s § 17200 claim based on the SEP Transfer 8 Theory. Apple’s § 17200 claim has two predicates: (1) the relevant defendants’ conduct 9 constitutes an unlawful business practice because the conduct violates § 5 of the Federal Trade 10 Commission Act, see generally 15 U.S.C. § 45(a)(1) (providing that “[u]nfair methods of 11 competition in or affecting commerce and unfair or deceptive acts or practices in affecting 12 commerce, are hereby declared unlawful”); and (2) the relevant defendants’ conduct constitutes an 13 unfair business practice because “it violates the spirit and policy of the antitrust laws.” FAC ¶ 14 454. In their papers, Defendants argue that the Ninth Circuit’s decision in Qualcomm clearly 15 16 undercuts Apple’s § 17200 claim to the extent it is based on an unfair business practice – i.e., one 17 that violates the spirit and policy of the antitrust laws. In Qualcomm, the Ninth Circuit held that, 18 as a general matter, a breach of an SSO commitment does not rise to the level of an antitrust 19 violation. See Qualcomm, 969 F.3d at 996-97 (distinguishing one case because the plaintiff had 20 pled that the defendant intentionally falsely promised to license its SEP on FRAND terms; 21 characterizing the case as an “‘intentional deception’ exception to the general rule that breaches of 22 SSO commitments do not give rise to antitrust liability”). The court specifically noted that it 23 24 25 26 27 28 10 Based on the Court’s ruling above, it does not address Defendants’ other arguments, such as those on antitrust injury and those specific to the § 1 claim. The Court, however, notes, that for the § 1 claim, Plaintiffs do not simply need to “allege that the [relevant] defendant intended to enter the agreement, and the agreement was anticompetitive.” Opp’n at 33 (emphasis in original). Rather, Plaintiffs must allege that the agreement was intended to harm or restrain trade. See Brantley v. NBC Universal, Inc., 675 F.3d 1192, 1197 (9th Cir. 2012) (noting that a plaintiff must prove, inter alia, a contract or conspiracy by which the persons or entities “‘intended to harm or restrain trade’”). Furthermore, Plaintiffs must have nonconclusory allegations to support such an intention. 27 Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 28 of 29 1 found persuasive the policy argument that antitrust laws should not be used “to remedy what are 2 essentially contractual disputes between private parties engaged in the pursuit of technological 3 innovation.” Id. at 997. In light of Qualcomm, Apple’s unfairness claim lacks merit. And in its 4 opposition brief, Apple does not really dispute such, focusing on the fact that it has also predicated 5 its § 17200 claim on unlawfulness, i.e., a violation of the FTCA. See FAC ¶ 457 (“The FTC has 6 brought an action under Section 5 where, like here, an acquiring firm refused to abide by licensing 7 commitments that its predecessor made in connection with industry standard-setting activities.”) 8 (citing In the Matter of Negotiated Data Solutions, File No. 051-0094, available at 9 https://www.ftc.gov/enforcement/cases-proceedings/051-0094/negotiated-data-solutions-llc- 10 United States District Court Northern District of California 11 matter) (last visited Dec. 16, 2020). Defendants argue the unlawfulness claim must also be dismissed because the alleged § 5 12 violation essentially claims anticompetitive conduct and Qualcomm “would be a mere formality if 13 the FTC and private plaintiffs could simply assert that FRAND violations were anticompetitive 14 under Section 5 of the FTC [Act].” Reply at 24. See generally 15 U.S.C. § 45(a)(1) (providing 15 that “[u]nfair methods of competition in or affecting commerce and unfair or deceptive acts or 16 practices in affecting commerce, are hereby declared unlawful”). The Court agrees. Apple’s § 5- 17 based claim, as pled, is grounded in antitrust law and policy which would serve as the basis of any 18 FTC jurisdiction here. Cf. FTC v. Brown Shoe, Inc., 384 U.S. 316, 321 (1966) (stating that “[t]his 19 broad power of the [FTC] is particularly well established with regard to trade practices which 20 conflict with the basic policies of the Sherman and Clayton Acts even though such practices may 21 not actually violate these laws”); see also FTC, Statement of Enforcement Principles Regarding 22 “Unfair Methods of Competition” Under Section 5 of the FTC Act (Aug. 13, 2015) (stating that 23 “Section 5’s ban on unfair methods of competition encompasses not only those acts and practices 24 that violate the Sherman or Clayton Act but also those that contravene the spirit of the antitrust 25 laws and those that, if allowed to mature or complete, could violate the Sherman or Clayton Act”). 26 Qualcomm thus bars the SEP Transfer Theory. 27 28 Accordingly, the Court dismisses Apple’s § 17200 claim based on the SEP Transfer Theory with prejudice. 28 Case 3:19-cv-07651-EMC Document 230 Filed 01/06/21 Page 29 of 29 1 2 III. CONCLUSION For the foregoing reasons, the Court dismisses all claims as pled in the FAC. The Court 3 dismisses with prejudice Counts 1-3 to the extent they are based on product markets (10)-(13). 4 The Court also dismisses with prejudice Count 4. To the extent Counts 1-3 are based on product 5 markets (1)-(9), the Court dismisses without prejudice as it may be that Plaintiffs are able to cure 6 the deficiencies identified above. Plaintiffs shall have 30 days to file a second amended complaint 7 (“SAC”). 8 This order disposes of Docket No. 203. 9 10 IT IS SO ORDERED. United States District Court Northern District of California 11 12 Dated: January 6, 2021 13 14 15 ______________________________________ EDWARD M. CHEN United States District Judge 16 17 18 19 20 21 22 23 24 25 26 27 28 29
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