United States: Court Dismisses Intel's And Apple's Federal And State Antitrust Claims Against Patent Assertion Entities, Albeit With Leave Of Court To Amend The Complaint

Abstract

The Northern District of California dismissed a complaint by Intel and Apple alleging antitrust and unfair competition claims against several patent assertion entities finding they did not support a claim upon which relief could be granted under the requirements of the statutes. Nonetheless, the court granted Intel and Apple leave to amend their complaint to address the deficiencies. Intel and Apple have since refiled a more detailed complaint.

Background

Intel and Apple sued Fortress Investment Group LLC, Fortress Credit Co. LLC, (collectively "Fortress") and several patent assertion entities ("PAEs"), including Uniloc 2017 LLC, Uniloc USA, Inc., Uniloc Luxembourg S.A.R.L., VLSI Technology LLC, INVT SPE LLC, Inventergy Global, Inc., DSS Technology Management, Inc., IXI IP, LLC, and Seven Networks, LLC., asserting violations of both federal and state competition laws. According to Intel and Apple, the PAEs engaged in anticompetitive conduct by aggregating massive portfolios of weak patents and aggressively enforcing those patents by demanding licenses or filing meritless lawsuits. They also alleged that by holding a broad array of patents that act as substitutes and complements ¹ in different circumstances, Fortress and the PAEs stifled competition, and that Fortress either created or invested in the various PAEs to engage in waves of patent litigation to increase leverage and extract settlements.

Apple also alleged a violation of California's unfair competition law based on the transfer of standard essential patents ("SEP") from operating companies, who are subject to constraints established by standard setting organizations, to PAEs, who are not subject to the same constraints, thereby increasing transaction costs and evading FRAND (Fair, Reasonable, And Non-Discriminatory) commitments.

In response, Fortress and the PAEs filed a motion to dismiss arguing, among other things, that the complaint failed to adequately plead a relevant market for each of the causes of actions, an antitrust injury or conspiracy, and that the causes of action are barred by the Noerr-Pennington  immunity and/or the statute of limitations. The court agreed with Fortress and the PAEs, granting their motion to dismiss but providing Intel and Apple with leave to amend their complaint.

Intel and Apple have since refiled a more detailed complaint.

The District Court Opinion

Relevant Market

To prove their antitrust claims, the law required Apple and Intel to identify a relevant market defendants' alleged anticompetitive behavior impacted. In their complaint, Intel and Apple identified two markets: (1) the Electronics Patents Market, defined as the market for patents for high-tech consumer and enterprise electronic devices and components or software therein and processes used to manufacture them and (2) the Input Technology Market, referring to the functionality for cellular standards associated with each input technology. The first is relevant to the common antitrust claims against Fortress and the PAEs and the second is relevant to Apple's independent claim about the transfer of SEPs to the PAEs.

Regarding the common antitrust claims, the court explained that a plaintiff may prove that the challenged conduct has a substantial anticompetitive effect on the relevant market through direct evidence (such as proof of actual detrimental effects like reduced outputs, increased prices, or decreased quality) or indirect evidence (such as proof of market power and some evidence of harm to competition). That analysis requires some definition of the relevant market. Here, the court found two problems with Intel and Apple's assertions. First, their definition of the Electronics Patents Market was vague since it was unclear what products might fall in the "high-tech" category, and overly broad since the definition would cover all patents on electronics products, whether consumer or business-oriented, and all related components and software. Second, the court found Intel's and Apple's allegations of actual detrimental effects on competition to be largely conclusory, presenting only the possibility that the aggregation of patents deprived alleged infringers of substitutes, but not the plausibility  of antitrust violations.

With respect to Apple's Input Technology Markets for the SEPs, the court agreed with Fortress' and the PAE's contention that the definition was also vague and overbroad because Apple referred to SEPs for cellular standards with no specificity.

Antitrust Injury

Citing Ninth Circuit precedent, the court explained that antitrust injury consists of four elements: "(1) unlawful conduct, (2) causing an injury to the plaintiff, (3) that flows from that which makes the conduct unlawful, and (4) that is of the type the antitrust laws were intended to prevent."  The complaint referred to two potential antitrust injuries: (1) payment of inflated royalties and (2) payment of litigation costs for defending against suits or potential suits. The court explained these could amount to antitrust injuries if proven.

As to the first potential injury, the court found that Intel and Apple did not allege with sufficient specificity that Fortress' and the PAE's aggregation eliminated substitutes that impacted or will likely impact Intel and Apple due to having to pay inflated royalties. As to the second, the court similarly held that while Intel and Apple had incurred litigation costs from prior suits against the PAEs, it was not clear that those costs were incurred because of the elimination of substitutes.  

Noerr-Pennington Doctrine

Fortress and the PAEs alleged the Noerr-Pennington doctrine barred Intel's and Apple's allegations because the doctrine exempts Fortress and the PAEs from antitrust liability for bringing a lawsuit unless the lawsuit is a sham. The court noted that the "doctrine derives from the First Amendment's guarantee of 'the right of the people . . . to petition the Government for a redress of grievances'[;] [u]nder the . . . doctrine, those who petition any department of the government for redress are generally immune from statutory liability for their petitioning conduct." Citing numerous Ninth Circuit and Supreme Court precedent, the court explained that the Noerr-Pennington doctrine applied in three separate circumstances: (1) when the alleged competitive behavior consists of a single sham lawsuit; (2) when the alleged competitive conduct consists of filing a series of lawsuits that may have merit but are brought pursuant to a policy of initiating legal proceedings without regards to the merit and for the purpose of injuring a market rival; and (3) a middle ground where good faith litigation could be unlawful if done as part of an anticompetitive scheme but there had to be a causal connection between the antitrust violation and the litigation.

The court further expounded that liability cannot be predicated on petitioning activity, but if a defendant engages in anticompetitive conduct which does not constitute petitioning activity, it cannot immunize itself from liability for litigation-related damages if it asserts or tries to assert its unwarranted accumulation of market power through litigation. Since Intel and Apple relied on Fortress' and the PAEs' aggregation of patents, rather than litigation to enforce those patents, as the anticompetitive conduct, the court found the Noerr-Pennington doctrine did not bar the antitrust claims.

Unlawful Agreement to Restrain Trade

Fortress and the PAEs also challenged some of Intel and Apple's claims contending that Intel and Apple failed to allege an unlawful agreement, contract, or conspiracy to restrain trade. When analyzing this issue, the court noted that it was not clear whether Intel and Apple asserted a conspiracy claim, a claim that Fortress and each of the other defendants was in a separate conspiracy, or something in between. At most, the complaint alleged that Fortress invested in the PAEs, which is consistent with legal business behavior. Without more, the court found the allegations were insufficient to show Fortress or the PAEs were part of a broader scheme or agreement that would unduly restrain trade.

Unlawful Acquisition of Assets

With respect to Intel's and Apple's claims based on the acquisition of patents, Fortress and the PAEs argued that (1) any alleged injury resulted not from their patent acquisitions but rather from post-acquisition enforcement of patents and (2) a number of the transactions took place outside of the statute-of-limitations period and therefore the claim was time-barred.

As to the first issue, the court explained that "acquisition" for antitrust purposes includes not just the act of obtaining assets but also "the retention and use of those assets." Here, Intel and Apple relied on a theory of elimination of competition through the aggregation of patents, but the court found they failed to adequately allege such an aggregation eliminated substitutes to constitute unfair competition.

Regarding the statute-of-limitations claims, the court explained that damages carried a four-year statute of limitation period, but injunctive relief had no statute of limitations (with a four-year period as a guideline). The court reviewed each of the allegations and conduct at issue, and found Intel and Apple were not barred from seeking damages for conduct within the four-year limitation period or from seeking injunctive relief for all of the conduct at issue, including conduct occurring more than four years from the filing of the complaint.  

Anti-SLAPP Statute, Litigation Privilege, and Failure to State a Claim 

Regarding the California antitrust claims, Fortress and the PAEs argued (1) the claims should be stricken pursuant to California's anti-SLAPP (Strategic Lawsuit Against Public Participation) statute and (2) the claims should be dismissed for failure to state a claim for relief and/or based on a clear affirmative defense. Explaining the California claim was derivative of the two federal antitrust claims, and that Apple's claim was based on the transfer of alleged SEPs from third parties to the PAEs, the court found it already addressed that Intel and Apple failed to state a claim for relief and that it did not need to address any other arguments.

Settlement of DSS and Intel

DSS separately argued that the claims against it should be dismissed for two reasons. First, it entered into a settlement agreement with Intel as part of a prior lawsuit that included language releasing each side on any claims arising from the patents at issue in that case. The court explained that the antitrust issue here implicates unenforceability, which was an affirmative defense Intel previously asserted against DSS and found Intel had released DSS as to the two specific patents covered by the settlement agreement. The court, however, noted that the antitrust claims were based on different patents. Furthermore, Apple's antitrust claims were not barred by the settlement. Second, DSS argued the claims against it were time-barred, but the court disagreed, finding that each time a plaintiff is injured by a defendant's act, a cause of action accrues such that the conduct at issue here was "new" and not time-barred.

Strategy and Conclusion

When pleading antitrust claims based on allegations of aggregation and other potential anticompetitive conduct, parties should be guided by language of the statutes under which the claims are brought, as well as the case law interpreting the requirements of those statutes, so as to plead factual allegation, which if true, support the claims raised.   In the antitrust context, this can require identification of the relevant market as well as the injury resulting from the anticompetitive conduct.

The Intel  decision can be found here.

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