By Nicole D. Prysby, J.D.
The plaintiffs did not adequately allege product markets or supracompetitive pricing.
Claims that Fortress Investment Group LLC and related entities injured competition by aggregating patents failed for lack of plausible allegations of product markets and market power. Intel Corporation and Apple Inc. alleged that Fortress’s patent aggregation was intended for an anticompetitive purpose—to invest in patents at costs lower than the holdup value of the patents to ensnare potential licensees and to allow it and its patent assertion entities (PAEs) to assert possible claims of infringement to tax the commercial use of existing technology at rates beyond the actual value of the aggregated patents. The product market allegations failed either because the defendants have not yet asserted patents in those markets or the proposed markets were overbroad. The plaintiffs also failed to adequately allege market power in each of the 13 proposed product markets. For example, for most of the markets, the plaintiffs identified fewer than 10 patents held by the defendants. Without knowing how many patents there are in a given product market, the court could not conclude that the defendants’ possession of patents constituted market power (Intel Corp. v. Fortress Investment Group LLC, January 6, 2020, Chen, E.).
Intel and Apple sued Fortress and related entities, over their use of PAEs. Intel asserted that Fortress acquires patents through a subsidiary or invests in PAEs on terms so severe that the PAEs have no choice but to make aggressive and reckless patent assertions to attempt to generate the revenue required to meet their obligations to Fortress. Through this approach, Intel alleged, Fortress has obtained more than 1,000 electronics patents, including patents that are both substitutes for and complements to one another. The result is that by aggregating patents covering technologies that are alternatives for one another, Fortress injures competition in the same way as any merger of competitors. Intel further alleged that Fortress’s aggregation was intended for an anticompetitive purpose—to invest in patents at costs lower than the holdup value of the patents to ensnare as many potential licensees and to allow it and its PAEs to assert as many possible claims of infringement to tax the commercial use of existing technology at rates beyond the actual value (if any) of the aggregated patents. Apple also brought a claim based on the transfer of standard essential patents (SEPs) from third parties to Fortress and its PAEs. The plaintiffs brought claims under the Sherman Act Section 1, Section 7 of the Clayton Act, and California’s Unfair Competition Law. The defendants motioned to dismiss all claims.
Product markets and market power. The plaintiffs identified 13 product markets (e.g., network-based voice messaging, mobile device-to-device communication). Four of their proposed product markets failed because the defendants have not yet asserted patents in those markets and the plaintiffs presented no evidence of a threat that defendants would do so. The court rejected six of the remaining nine product markets, on the basis that the markets were not plausibly stated, because they were overbroad. For example, the product market health monitoring" was overbroad because it was not narrowed to any specific function. Three markets were adequately pleaded, because the plaintiffs narrowed the market to a specific function (e.g., the network-based voice messaging market was narrowed to the function of techniques to enable multiple recipients to access a voice message).
The plaintiffs also failed to adequately allege market power in each of the proposed product markets. For most of the markets, the plaintiffs identified fewer than 10 patents held by the defendants. Without knowing how many patents there are in a given product market, the court could not conclude that the defendants’ possession of patents constitutes market power.
Nor did the plaintiffs provide evidence of actual detrimental effects, because they failed to plausibly allege supracompetitive pricing. For example, they provided no information about what companies paid as a result of patent licensing dispute settlements. The plaintiffs also alleged that royalties were supracompetitive because prior patent owners did not assert the patents. But the prior failure to assert patents did not mean that the patents were worthless—the plaintiffs alleged that the prior owners had competitive constraints that kept them from asserting the patents, thus indicating their market value could have been substantial but was not asserted by the prior owners. Some of the royalty charges alleged by the plaintiffs were for other patents in the same field, but those comparisons were immaterial, as there was no indication that those other patents are fair comparators for the patents at issue. Allegations as to sums demanded in patent litigation were of limited probative value, as a litigation demand is only a demand; there is no indication that anyone has paid that demand or anything close to it. The plaintiffs also failed to allege what substitute patents were available. The ability to extract a supracompetitive royalty is easier to infer if defendants held, for example, the five major patents in a field, but there was no such allegation.
Apple’s claims based on the SEP Transfer theory also failed. Claims that the defendants violated the unfair prong of the UCL failed, because as a general matter, a breach of a promise to license an SEP on fair, reasonable, and nondiscriminatory terms does not rise to the level of an antitrust violation. The unlawfulness prong claim (based on an alleged violation of the FTC Act) failed for similar reasons, as it essentially just claimed anticompetitive conduct.
This case is No. 3:19-cv-07651-EMC.
Attorneys: Mark Daniel Selwyn (Wilmer Cutler Pickering Hale and Dorr LLP) for Intel Corp. Morgan Chu (Irell & Manella LLP) for Fortress Investment Group LLC.
Companies: Intel Corp.; Fortress Investment Group LLC
MainStory: TopStory Antitrust GCNNews CaliforniaNews
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