United States: District Court Denies Motion To Dismiss Section 1 And Section 2 Claims Brought By PAE Against Patent Aggregator That Refused To License PAE’s Patents

In one of the latest battles at the nexus between antitrust and patent law, on Dec. 3, 2013, Judge Yvonne Gonzalez Rogers in the U.S. District Court for the Northern District of California allowed antitrust claims by Cascades Computer Innovation LLC to proceed against RPX Corp. and a number of Android device manufacturers. Cascades Computer Innovation LLC v. RPX Corp., No. 12-cv-01143 (N.D. Cal. Dec. 3, 2013). The case has highlighted significant potential implications for the patent aggregation business model, which has been widely adopted in the technology industry as a reaction to increased litigation from patent assertion entities.

Cascades is a "patent assertion entity" or "PAE"—pejoratively but commonly referred to as a "patent troll"—that does not practice patent claims but instead seeks to monetize them through litigation or licensing. Cascades holds a number of patents it claims are infringed by the Android mobile operating system. RPX is a patent aggregator, or "non-practicing entity" (NPE), formed by member manufacturers to aggregate patents and hold them to defend against patent litigation, including claims by PAEs. Cascades brought Section 1 and 2 and California state law claims alleging a hub-and-spoke conspiracy among RPX and its members to restrain trade in, and to monopsonize the market for, Cascades' patents. According to Cascades, RPX stands at the center of the conspiracy (the hub), with agreements between RPX and the manufacturers (including Samsung, HTC and Motorola—which settled after the decision) forming the spokes and an agreement among the manufacturers as the rim of the conspiracy. According to Cascades, the defendants agreed not to deal with Cascades in its licensing efforts, other than through RPX. Cascades claims the goal and effect of the alleged conspiracy was to drive down the price for the Cascades patents.

Judge Rogers had dismissed Cascades' first complaint, holding that its initial allegations of parallel conduct were insufficient to support its antitrust claims. In its amended claims, Cascades alleged that the manufacturers refused to deal with Cascades, insisting that only RPX could negotiate over the patents at issue. Unlike its initial complaint, Cascades' amended complaint provides details regarding negotiations between RPX and Cascades over the patents, and the refusal of the manufacturers individually to negotiate. Although the defendants argued that Cascades had simply overvalued its patents—and that this was a more plausible explanation for the refusal to negotiate than a complicated conspiracy—the court held that at this stage of the litigation, Cascades had sufficiently pleaded the elements of its Section 1 and 2 claims. As for the monopsonization claim, Cascades pointed to RPX's position as the sole purchasing agent for manufacturers representing more than 90 percent of Android phones in the United States and 75 percent of the U.S. Android mobile phone and tablet market.

The court found one allegation to be particularly telling—Cascades' claim that although it offered a deeply discounted deal (essentially offering a free license to the first manufacturer to agree), none of the manufacturers chose to negotiate over the offer. Action taken against a defendant's own economic self-interest has been viewed by courts in other contexts as an important indicator of anticompetitive intent—most notably, in the U.S. Supreme Court's Section 2 decision in Aspen Skiing Co. v. Aspen Highlands Skiing Corp. 472 U.S. 585 (1985).

The court also ordered Cascades to show good cause why the case should not be stayed pending patent infringement litigation brought by Cascades. The issue of stays is important in cases involving antitrust claims in patent litigation, because in some situations resolving patent infringement claims first can help avoid expensive and risky antitrust litigation, or prompt earlier settlement of the litigation.

On Jan. 31, 2014, Cascades and Motorola filed a stipulation of settlement and sought dismissal of the action as to Motorola.

A copy of the decision is available here.

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