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Patent Troll's 'Hub And Spokes' Conspiracy To Monopsonize Claims Survive Dismissal

Friday, December 6, 2013
By Eleanor S. Tyler

Dec. 4 --A patent troll's second try at pleading a hub-and-spokes conspiracy among Android device manufacturers to refuse to license the company's patents succeeds in stating claims under both Sherman Act §1 and §2 for a conspiracy to monopsonize, according to a Dec. 3 opinion from the U.S. District Court for the Northern District of California, which denied the defendants' motions to dismiss (Cascades Computer Innovation LLC v. RPX Corp., N.D. Cal., No. 4:12-cv-01143-YGR, 12/3/13).

Judge Yvonne Gonzalez Rogers essentially concluded that the very economic incentive to set up a “defensive patent aggregator” to negotiate a global deal with patent trolls for all its member organizations serves as a plausible basis to infer that the members conspired when they refused individual offers to deal from the plaintiff, Cascades Computer Innovation LLC.

The court also ordered Cascades to show cause why this case should not be stayed pending the outcome of patent litigation under the patents at issue in the Northern District of Illinois.

Challenged Conduct
Cascades Computer Innovation LLC, which holds the rights to a portfolio of 38 patents relating to technology purportedly optimizing use of the Android operating system, brought suit against the most significant manufacturers of Android devices--namely, Dell, Inc., HTC Corp., LG Electronics, Inc., Motorola Mobility, Inc. and Samsung Electronics Co. It alleged a conspiracy to monopsonize the market to buy Cascades' patent licenses by refusing to deal with Cascades.

Cascades also sued RPX Corp., a “defensive patent aggregator” or “anti-troll,” formed to protect its members from non-practicing entities (NPEs), like Cascades. According to Cascades' complaint, RPX acts as an intermediary for the manufacturing defendants who are its members in acquiring and licensing patents and effectively discourages those members from dealing independently with patent owners.

The complaint claimed that, at some point, the manufacturers, RPX and others formed a conspiracy not to license Cascades' patents. Pursuant to this alleged conspiracy, the defendants agreed that, in addition to refusing to license the patents, none would negotiate with Cascades independently “and all would infringe on Cascades' patents without paying royalties.”

They also purportedly agreed to commonly defend against separate infringement suits filed by Cascades, allegedly agreeing that none would settle, discuss the possibility of a license, negotiate independently, or act inconsistently with any other defendant. Despite that agreement, Dell made what Cascades scoffed was a “token” offer of less than $100,000 to license Cascades' patents, which Cascades characterized as “spurious and made in bad faith.” In response, Cascades offered the remaining manufacturers licensing proposals that would have required a lump-sum payment of $5 million with the right to recover some of that payment based on licensing revenues Cascades received from other manufacturers (incentivizing the first to jump at the deal with a lower overall payment for the licenses, subsidized by any subsequent manufacturers to sign on). No defendant responded to the offer.

Cascades alleged a hub-and-spokes conspiracy between the manufacturers and their patent aggregator, RPX, to boycott taking licenses from Cascades. The purpose of this conspiracy, Cascades averred, was to monopsonize the market for Cascades' patents.

RPX contended that no one licensed Cascades' patents because it overpriced its licenses, not because of any collusion. RPX contended that this fact explains entirely why it did not take a license on behalf of its members. It continued that Cascades' attempt to negotiate with individual manufacturers, or to only license its patents to RPX's members piecemeal, was doomed to fail because Cascades is actively litigating some of these patents against those companies and that they therefore could reasonably see a license deal for less than all the patents as merely an invitation to serial litigation.

The manufacturers argued that the alleged conspiracy makes no economic sense. They echoed RPX's argument that overvaluation of the patents at issue is a perfectly plausible alternative explanation for their veto of an initial license agreement struck through RPX and subsequent refusal to negotiate individually.

Cascades alleged four federal claims: (1) a horizontal conspiracy among all defendants to restrain trade in violation ofSherman Act §1, 15 U.S.C. §1; (2) a vertical conspiracy among all defendants in violation of §1; (3) a conspiracy to monopsonize among all defendants in violation ofSherman Act §2, 15 U.S.C. §2; and (4) against RPX only, a separate §2 monopsonization claim. The alleged market restrained by these actions was the “market for purchase acquisition or licensing of technology covered by” a portfolio of Cascades' patents, with a single patent (the '750 patent) constituting a submarket.

The court dismissed Cascades' initial complaint for failure to state its claims because it failed to allege anything more than parallel conduct, instead resorting to what the court characterized as merely generalized pleading. Cascades filed a first amended complaint (FAC), which was subjected to the defendants' motion to dismiss.

Hub and Spokes
Judge Rogers, this time denying the motion, concluded that Cascades has alleged enough facts suggesting concerted action to survive the pleading stage. Since Cascades' federal claims survive, its dependent state law claims likewise survive, the court added.

As to RPX's contention that overpricing, rather than some grand conspiracy, was the reason for Cascades' failure to license its patents, the court admitted that this alternative explanation for the facts Cascades alleged is plausible, but the court did not find it “so fully and convincingly explanatory as to render Cascades' revised allegations implausible by comparison.” While the court saw that as a plausible reason why RPX would not cut a license deal with Cascades on behalf of its members, the court failed to see how that would explain each manufacturer's refusal to deal with Cascades individually when the amount they would have to pay, in the court's reckoning, was “a figure roughly in line with the amount each Manufacturing Defendant would have had to pay under the original … offer.” Anyway, the court added, the reasonableness of Cascades' pricing is not amenable to decision at the pleading stage.

As to the manufacturers' argument, the court considered that, “[p]lainly, the conspiracy alleged by Cascades makes economic sense because it would permit potential licensees of the '750 Patent to realize RPX's publically [sic] stated promise of 'wholesale' pricing, provided they refrained from competitively bidding against each other and sent RPX to the market in their stead, where it would be the sole viable purchaser.”

The court reasoned: “Close reading of the Manufacturing Defendants' argument reveals that they do not contend that this alleged arrangement makes no sense; rather, they argue that the arrangement is implausible because economic self-interest explains the Manufacturing Defendants' alleged behavior as well or better than illegal collusion.” But the court credited several express allegations that one manufacturer refused to deal with Cascades on the ground that it preferred to negotiate through RPX, that RPX represented itself as speaking for all the manufacturers collectively, and that none of the manufacturers bit at Cascades' teaser deal that offered a discount to the first manufacturer to accept. These facts, the court surmised, “tend to exclude innocent explanations for the Manufacturing Defendants' refusal to deal individually with Cascades and lend plausibility to the FAC's allegations of conspiracy.”

Further, the court reasoned, those facts demonstrate how the manufacturers could all gain by forgoing their individual self-interest and acting only through RPX. In short, the court concluded, the amended complaint contains “facts which, if true, would tend to discount entirely innocent explanations and plausibly suggest an economic benefit to be derived from conspiring.”

As to the alleged vertical conspiracy, the court saw the allegation as one to agree to fund a deal with Cascades through RPX either collectively or not at all, “as suggested by RPX's withdrawal from the deal after 'one or more of its members' refused funding.” That agreement, “to use RPX exclusively notwithstanding the purported ability to refrain from doing so, is the secondary vertical agreement plausibly suggested by the facts alleged in the FAC,” the court stated.

About That Rim …
The court also discerned sufficient allegations of a horizontal conspiracy among the manufacturers--the “rim” to the wheel of the conspiracy--to permit the claim to go forward.

While the defendants maintained that the new complaint continues to allege no more than organizational membership and parallel conduct, the court credited new factual allegations with raising Cascades' claim of a horizontal conspiracy above the “plausibility” bar. The court specifically referred to Cascades' allegation that one representative of Motorola affirmatively expressed a desire to conduct business only through RPX. While that might be an independent business decision, the court averred, it is suspect in light of RPX's statements to Cascades that several members had raised the amounts necessary to fund the deal RPX and Cascades originally reached for the patent licenses. Along with RPX's later withdrawal from the deal, based on some members balking and refusing to pay the negotiated amount, the court reasoned that there is evidence in the complaint that RPX knew and members knew that the members funding the deal had to agree on a price for the Cascades' licenses.

The court further noted that RPX had told Cascades that its members collectively only wanted to license Cascades' full portfolio, not just a single patent. “This allegation supports a reasonable inference that the Manufacturing Defendants and RPX had agreed on a concerted course of action regarding how to deal with Cascades,” the court deduced.

Restraint of Trade?
The court further reasoned that the agreements alleged would restrain trade if proven and that the resulting restraint would be unreasonable.

The defendants contended that no restraint of trade is pleaded at all--much less an unreasonable one--because the agreement between RPX and its members expressly permits members to negotiate and enter licensing agreements on their own. In fact, the defendants noted, two RPX members did so and reached license agreements with Cascades for a specific patent. However, the court refused to credit that argument because it would force the court “impermissibly to disregard well-pleaded evidentiary facts alleged in the complaint and draw inferences adverse to Cascades.”

Moreover, the court acknowledged Cascades' argument that it does not follow from the fact that manufacturers would be permitted to deal independently that they did in fact do so. The fact that two manufacturers “broke” with the alleged conspiracy and negotiated a deal with Cascades “does not render implausible the inference of a secondary agreement to deal with Cascades only through RPX.” Therefore, the court reasoned, the complaint alleged a restraint of trade.

That restraint is unreasonable, the court continued. The court reasoned that the FAC improves its definition of the market enough to survive dismissal, waiving off the defendants' arguments that Cascades' asserted market fails because the complaint contains no allegations about reasonable interchangeability, cross-elasticity of demand, or other factors that define the limits of a relevant market. Cascades need not demonstrate those things, the court explained, because it “alleges a monopsony in the market to buy Cascades' patents, not a monopoly in the market to sell them.” Since Cascade has alleged that the manufacturer defendants comprise 75 to 90 percent of the underlying market for at least the submarket for the '750 patent, according to the complaint, the court reckoned that “suffices to establish a plausible market, sufficient to survive a Rule 12(b)(6) motion.” The court also dismissed an argument by RPX that the complaint overstates the part of the market controlled by the defendants because it addresses a factual dispute rather than a pleading deficiency, the court averred.

Monopsonization
The court also concluded that Cascades states claims under Sherman Act §2.

The court rejected RPX's motion to dismiss on the grounds that Cascades failed to allege market power and market share. Cascades alleged that RPX wields monopsony power in the markets for Cascades' patents by virtue of its role as purchasing agent for more than 90 percent of the manufacturers who make Android devices, the court explained. That's sufficient, the court averred.

Nor will the Noerr-Pennington doctrine immunize the defendants' behavior, the court noted. The allegations of the FAC do not support a conclusion that the threat of litigation, if any, inherent in Cascades' licensing negotiations with manufacturers made its talks with RPX into presuit settlement demands, the court said. The court likewise rejected the defendants' two other Noerr-Pennington arguments.

Show Cause
The court, however, ordered Cascades to show cause why this action should not be stayed pending resolution of the merits of patent litigation underway in the Northern District of Illinois.

In that court, Cascades has multiple cases pending against various manufacturers of Android devices alleging infringement of the '750 patent.

The court ordered a written response from Cascades by Dec. 10 (five business days after the date of the court's order).

Counsel for plaintiff: Ashley E. LaValley, Daniel Richard Ferri, Gabriel I. Opatken and Raymond P. Niro, Niro Haller & Niro, Chicago, Ill.; Martin L. Fineman, Davis Wright Tremaine LLP, San Francisco, Cal.; counsel for defendant RPX Corp.: Alfred Carroll Pfeiffer, Jr., Charles S. Crompton III and Hanno Kaiser, Latham & Watkins LLP, San Francisco, Cal.; counsel for defendant HTC Corp.: Daniel Paul Weick, Jonathan M. Jacobson and Chul Pak, Wilson Sonsini Goodrich & Rosati, New York, N.Y.; Lisa Davis, Wilson Sonsini Goodrich & Rosati, Palo Alto, Cal.; counsel for Samsung Electronics Co., Ltd.: Michael W. Scarborough, Sheppard Mullin Richter & Hampton LLP, San Francisco, Cal.; counsel for defendant Dell Inc.: Kimball Richard Anderson and Samuel Mendenhall, Winston & Strawn LLP, Chicago, Ill.; Paul R. Griffin and Sean D. Meenan, Winston & Strawn LLP, San Francisco, Cal.; counsel for defendant Motorola Mobility LLC: Eugene Chatham Crew, Jessica Lea Hannah, and Richard L. Grossman, Kilpatrick Townsend & Stockton LLP, San Francisco, Cal.


Text of the court's decision is at http://www.bloomberglaw.com/public/document/Cascades_Computer_Innovation_LLC_v_RPX_Corporation_et_al_Docket_N

To contact the reporter on this story: Eleanor Tyler in Washington at etyler@bna.com

To contact the editor responsible for this story: Sheldon B. Richman at srichman@bna.com

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