Antitrust Law Daily Auto finance company’s monopolization, Walker Process claims move forward
Thursday, April 7, 2016

Auto finance company’s monopolization, Walker Process claims move forward

By Greg Hammond, J.D.

An auto finance company sufficiently alleged actual and attempted monopolization claims against a competitor by allegedly enforcing a business method patent obtained by fraud on the U.S. Patent and Trademark Office (PTO) in order to harm competitors in the market for sub-prime auto loans. The federal district court in Los Angeles denied the defendant’s motion to dismiss, finding that the auto finance company adequately alleged a relevant market, market power, a Walker Process fraud claim, and antitrust injury (Westlake Services, LLC v. Credit Acceptance Corp., April 6, 2016, Otero, S.).

Following dismissal of their complaint in December 2015 against Credit Acceptance Corp. (CAC), auto finance companies Westlake Services, LLC and Nowcom Corp. filed an amended complaint, alleging that CAC engaged in monopolization and attempted monopolization. CAC moved to dismiss.

Relevant market. The court first determined that there is no “fatal legal defect” that warrants dismissal on the basis of the alleged relevant product market—which the plaintiffs claim to be “the business of providing indirect financing for used car sales to dealers through a profit sharing program.” The allegations were sufficient to demonstrate that the alleged submarket for providing indirect financing for used car sales to dealers through a profit sharing program is “economically distinct” from the general product market of automobile financing, including allegations that (1) there are no reasonable substitutes for these financing programs because dealers who specifically desire to share in the customer payments have no other means to sell the retail installment sales contracts to an indirect lender; and (2) two potential alternatives to the profit sharing program—purchase programs and “Buy Here, Pay Here”—have several potential disadvantages for dealers.

Market power. Allegations of market power were also sufficient to survive dismissal. In particular, the plaintiffs alleged that: (1) CAC is an “entrenched player” in the market for used car loan indirect financing profit sharing programs in the United States, possessing a more than 85 percent share of the market; (2) CAC has the power to control prices and/or to exclude competition in the relevant market, and has in fact excluded competition by enforcing its rights in its ’870 patent against its competitors, which Westlake claims was fraudulently obtained; and (3) there are significant barriers to market entry, including CAC’s intellectual property rights, the substantial up-front capital investment required to penetrate the relevant market, and the requirement of access to a nationwide sales and distribution network.

Walker Process fraud. The complaint also sufficiently established, with particularity, a false representation or deliberate omission of fact material to patentability that was made with the intent to deceive a patent examiner. Westlake claimed that CAC, the named inventor of the ’807 patent, and CAC’s prosecution attorneys made deliberate omissions of fact material to patentability to the examiner, including CAC’s prior public use of the Credit Approval Processing System (CAPS) program embodying the claims of the ‘807 patent, which occurred as early as August 2000, and prior sales of CAPS despite knowing about them. The complaint also asserted that CAC, the named inventor, and CAC’s patent prosecution firm all knowingly withheld the public use and sale information, demonstrating an intent to deceive the PTO. Westlake therefore adequately pleaded a substantive Walker Process claim.

Sham litigation. Westlake’s action was also excepted from Noerr immunity under the sham litigation doctrine, the court next determined. Westlake adequately alleged that CAC initiated and obtained an objectively baseless lawsuit because it knew the ’807 patent was fraudulently procured through material intentional misrepresentations and omissions that CAC used to drive Westlake out of the market. Westlake also claimed that CAC initiated, and maintained bad faith and sham patent infringement litigation with the specific intent to interfere directly with Westlake’s actual and potential business relationships.

Antitrust injury. Finally, Westlake adequately pleaded antitrust injury by alleging that CAC’s enforcement of the ’807 patent has caused and produced antitrust injury by substantially and unreasonably restricting, lessening, foreclosing, and eliminating competition in the development, marketing, and sale of indirect financing profit sharing programs for used automobile loans. The complaint also alleged that CAC’s conduct has: (1) erected barriers to entry in the relevant market; (2) limited consumer and dealer choice as to selection, price and quality of such programs; (3) artificially restricted and reduced consumer and dealer access to Westlake’s competitive financing programs; (4) restrained or monopolized the market for development, marketing, and sale of indirect profit sharing programs; and (5) enabled CAC to charge supracompetitive prices for indirect profit sharing programs to the detriment of consumers and dealers. The motion to dismiss was therefore denied with regard to Westlake.

Nowcom, however, did not establish antitrust injury because the complaint did not included Nowcom in the exhaustive list of players in the concentrated relevant product market. The complaint also did not allege how or why Nowcom—a company that provides technological services to one of CAC’s competitors—was itself either a consumer of CAC’s services or one of its competitors. The motion to dismiss was therefore granted with regard to Nowcom.

The case is No. CV 15-07490 SJO (MRWx).

Attorneys: Donald R. Pepperman (Blecher Collins Pepperman and Joye) and Ekwan E. Rhow (Bird Marella Boxer Wolpert Nessim Drooks Lincenberg Rhow PC) for Westlake Services LLC and Nowcom Corp. James Young Pak (Skadden Arps Slate Meagher and Flom LLP) for Credit Acceptance Corp.

Companies: Westlake Services LLC; Nowcom Corp.; Credit Acceptance Corp.

MainStory: TopStory Antitrust CaliforniaNews

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