Latest Thinking | Antitrust/Competition

Patent Troll Defeats Motion to Dismiss Monopsony Claims

Late last year, a federal court in the Northern District of California denied motions to dismiss antitrust claims brought by a non-practicing entity (also known as an NPE or patent troll) in Cascades Computer Innovation LLC v. RPX Corporation et al.1 The court held that the NPE plausibly alleged that Android cell phone manufacturers and a defensive patent aggregator formed an anticompetitive “hub-and-spoke” conspiracy to monopsonize the market for licensing the Android patent owned by the NPE. The NPE had filed patent infringement lawsuits against each of the individual manufacturers in the Northern District of Illinois in the midst of licensing negotiations with the patent aggregator. In denying the motions to dismiss, the court found it persuasive that no manufacturer accepted individual licensing offers from the NPE and would only deal with the NPE through the patent aggregator, even though the contracts between the manufacturers and the patent aggregator permitted individual negotiation and licensing with the NPE. The decision highlights the potential antitrust risks when potential licensees band together to negotiate or deal with a patent owner, and that the protection of the Noerr-Pennington doctrine does not extend to all litigation-related activity.

Cascades Computer Innovation LLC (Cascades), a non-practicing entity, owns a patent that purports to optimize the Android operating system. Cascades sought to license its patent to HTC, Motorola, Samsung (Manufacturing Defendants), and other manufacturers of Android-compatible phones and tablets. RPX Corporation is a defensive patent aggregator that purchases patent licenses and sublicenses those patents to its members in a patent portfolio. RPX began negotiations with Cascades, on behalf of the Manufacturing Defendants and others, to license the Android patent. In the midst of these negotiations, Cascades filed patent infringement lawsuits against the individual Manufacturing Defendants and other RPX members.2 Negotiations between RPX and Cascades eventually broke down, and Cascades offered the individual Manufacturing Defendants identical licensing terms. No Manufacturing Defendant responded to these offers, and Cascades filed this antitrust action.

In its complaint, Cascades alleged that the defendants participated in a conspiracy to monopsonize the market to license Cascades’ patents, in violation of Sections 1 and 2 of the Sherman Act and California unfair competition laws.3 The court held that Cascades had alleged sufficient facts to support a reasonable inference that the Manufacturing Defendants and RPX engaged in a “hub-and-spoke” conspiracy in which they agreed to refrain from negotiating with Cascades individually and only negotiate a collective license through RPX.4 By acting only through RPX, the Manufacturing Defendants could allegedly maintain a single-buyer market with the requisite market power to drive the price of Cascades’ licenses down. The defendants argued that RPX withdrew from licensing negotiations because Cascades overpriced its patent licensing and not because they had colluded.5 However, the court found the following facts persuasive in plausibly alleging a conspiracy to monopsonize:

1) RPX told Cascades that all members contributed to raise the money to fund a potential deal, but RPX later withdrew its offer when one member refused to pay that amount, evidencing that Manufacturing Defendants agreed to fund the licensing deal “either collectively or not at all6;

2) none of the Manufacturing Defendants responded to Cascades’ individual licensing offers;

3) Motorola expressly told Cascades that it preferred to deal through RPX and refused to negotiate individually; and

4) the Manufacturing Defendants (and thus RPX) had monopsony power in the market for Cascades’ Android patent since they collectively controlled more than 90 percent of Android-operated cell phone business.7

Notably, the court found that clauses in the agreements between RPX and its members providing that a member could deal individually with a licensor were not persuasive, since Cascades plausibly alleged that the defendants had an “off-the-books” understanding that they would only deal through RPX.8

The defendants also attempted to invoke Noerr-Pennington immunity as an affirmative defense. Specifically, the Manufacturing Defendants claimed that their decisions to accept or reject the individual licensing offers from Cascades were actually decisions on whether or not to settle Cascades’ pending patent infringement lawsuits. The defendants argued that, under Ninth Circuit precedent, a decision to accept or reject an offer of settlement is conduct incidental to the prosecution of the suit,9 and therefore the defendants’ refusal to license or purchase the patent was protected under the Noerr-Pennington doctrine. The court rejected the defendants’ argument and held that any threat of litigation inherent in the individual licensing negotiations was not concrete or definite enough to establish that the offer to license constituted a presuit settlement demand.10 The court allowed all federal claims to survive as well as the California state law claims, since it had earlier ruled that those claims rise and fall with the federal claims.11 However, the court ordered Cascades to show cause as to why the antitrust lawsuit should not be stayed until the pending patent infringement lawsuits in the Northern District of Illinois are resolved.

Following the December 2013 decision, Cascades and Motorola reached a confidential agreement to settle Cascades’ claims for an undisclosed sum.12 On January 31, 2014, Cascades and Motorola filed a joint stipulation to dismiss Motorola from the antitrust suit.13 The settlement will not affect Cascades’ claims against RPX, HTC, and Samsung.

The Cascades decision serves as a reminder of the antitrust implications of forming and operating patent aggregators, patent pools, and other collectives of technology licensors or licensees. In limited circumstances, US antitrust law treats intellectual property licensing differently from sales of goods and services, and permits licensors to apply restrictions and reach agreements that would raise greater risk in other product markets. However, this does not mean that IP licensing is immune from traditional antitrust principles, and thus patent licensees (as well as licensors) must remain cognizant of the competitive effects of any concerted practices and the attendant antitrust risk.

The case also demonstrates that courts are more likely to focus on facts and the conduct of parties than to rely on contractual language when evaluating potential competitive effects. In this case, the RPX agreement contained a clause permitting the Manufacturing Defendants to negotiate and license individually from Cascades. While the Manufacturing Defendants cited this in support of their argument that there was no conspiracy to monopsonize, the court focused on the course of conduct of the parties to find plausible evidence of conspiracy.

Finally, the case highlights the uncertainty of what litigation-related conduct falls under the protection of Noerr-Pennington, and what conduct is not protected because it is merely related to a lawsuit. The law in this area is not settled, and caution is merited.

Endnotes    (↵ returns to text)
  1.  2013 WL 6247594, N.D. Cal. (Dec. 3, 2013).
  2.  See Second Amended Complaint, Cascades Computer Innovation LLC v. HTC Corporation et al., No. 1:11-cv-06235 (N.D. Ill. Feb. 17, 2012), ECF No. 45; Third Amended Complaint, Cascades Computer Innovation LLC v. Motorola Mobility Holdings, Inc. et al., No. 1:11-cv-04574 (N.D. Ill. Feb. 16, 2012), ECF No. 36.
  3.  See Amended Complaint, Cascades Computer Innovation LLC v. RPX Corporation et al., No. 4:12-cv-01143 (N.D. Cal. Feb. 20, 2013), ECF No. 94.
  4.  Cascades, 2013 WL 6247594, at *9-12.
  5.  Id. at *7.
  6.  Id. at *13.
  7.  Id. at *16.
  8.  Id. at *12.
  9.  See Columbia Pictures Industries, Inc. v. Professional Real Estate Investors, Inc., 944 F. 2d 1525, 1528 (9th Cir. 1991) (“[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.”).
  10.  Cascades, 2013 WL 6247594, at *17.
  11.  Order Granting Defendants’ Motions to Dismiss the Complaint with Leave to Amend, Cascades Computer Innovation LLC v. RPX Corporation et al., No. 4:12-cv-01143 (N.D. Cal. Jan. 24, 2013), ECF No. 93.
  12.  See “Cascades and Motorola Strike Pact in Android Patent Suit,” Global Competition Review, Feb. 4, 2014, available at http://globalcompetitionreview.com/usa/article/35173/cascades-motorola-strike-pact-android-patent-suit/.
  13.  Stipulation and [Proposed] Order of Dismissal, Cascades Computer Innovation LLC v. RPX Corporation et al., No. 4:12-cv-01143 (N.D. Cal. Jan. 31, 2014), ECF No. 128.
Molly Storey

Molly Storey

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