Antitrust Law Daily Claims that Cisco attempted to stifle competition in secondary market for its equipment proceed
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Monday, December 9, 2019

Claims that Cisco attempted to stifle competition in secondary market for its equipment proceed

By Nicole D. Prysby, J.D.

Importer alleged that Cisco violated the UCL by designating its equipment "used" if sold to an unauthorized reseller but not if identical equipment is sold to an authorized reseller go forward.

A counterclaim that Cisco System Inc. violated California’s Unfair Competition Law (UCL) by misclassifying equipment sold on the secondary market as "used" goes forward, held the federal district court in San Francisco. Cisco sued Link US, LLC, alleging that Link and its President unlawfully imported and sold counterfeit Cisco goods. Link counterclaimed, alleging that Cisco violated the UCL. The UCL counterclaim goes forward on the basis of allegations that Cisco considers its equipment "used" once it is sold to an unauthorized reseller, but not when identical equipment is sold to an authorized reseller. Using the word "used" this way was likely to mislead consumers. The other bases for Link’s UCL claim (relating to alleged misinformation regarding the secondary market for Cisco goods, selective enforcement, and software licensing) were insufficient to support the UCL claim. Claims against Link’s President failed for lack of personal jurisdiction because his only connection to California was being listed as the return addressee on a package sent to California and a plaintiff cannot manufacture personal jurisdiction by purchasing the accused product in the forum state (Cisco Systems Inc. v. Link US, LLC, December 6, 2019, Breyer, C.).

Cisco, a networking hardware, software, and services company, alleged that Link and its President (Basem Toma) unlawfully imported and sold counterfeit Cisco goods. Cisco also alleged that it undertook its own investigation and ordered Cisco goods from Link which turned out to be counterfeit. The counterfeit items were shipped to an investigator in California and the return address on two of the packages shipped to the investigator included Toma’s name. Toma is a resident of North Carolina. Link counterclaimed, alleging that Cisco attempted to stifle competition in the secondary market for its equipment, in violation of the UCL.

Personal jurisdiction. The court concluded that it did not have personal jurisdiction over Link’s President, Toma. Cisco’s only allegations of an alter ego relationship are conclusory statements that Toma controls Link’s day-to-day operations and is the alter ego of Link and Cisco failed to demonstrate that Toma committed an intentional act aimed at California. General allegations of managerial responsibilities are not sufficient to establish specific jurisdiction and the mere appearance of Toma’s name on the return address for the packages sent to Cisco’s investigator is insufficient to plausibly allege that he was involved in their shipment. It is more likely that his name is part of the return address simply because he set up Link’s FedEx account. And Cisco cannot manufacture personal jurisdiction by purchasing the accused product in the forum state. However, the court granted Cisco’s request to conduct jurisdictional discovery.

UCL counterclaim. Link identified four examples of alleged anticompetitive behavior, three of which the court found failed to provide a basis for the UCL claim. Cisco allegedly misled consumers into believing it was unlawful to buy its products from independent resellers by describing such sales as "unauthorized." This was not sufficient to support a UCL claim because the statements were not likely to deceive consumers because a reasonable consumer would understand that sales by independent resellers are not authorized by Cisco and that the "consequences" of purchasing equipment from these sources are increased risk of technical malfunctions and fewer services from Cisco (rather than legal liability). Link alleged that Cisco targets independent resellers for unwittingly importing suspected counterfeit goods, while turning a blind eye to comparable conduct by participants in the Cisco ‘Authorized Network.’ But Link did not explain why it was unfair for Cisco to choose to pursue some but not all of the litigation it could initiate. Link’s third basis for its UCL claim is that Cisco claims that users who buy its equipment from independent resellers are not authorized to use the software on that equipment. Link argues that under the first sale doctrine, Cisco cannot lawfully prevent consumers buying on the secondary market from using its software. However, if Cisco licenses (as opposed to sells) its software, then it has a legal right to deny resellers the ability to resell that software, and its claims to that effect are neither fraudulent nor anti-competitive. Because Link alleged no facts suggesting that Cisco software users are purchasers rather than licensees, Link’s UCL claim was dismissed insofar as it was based on the software licensing allegations.

Link’s final example of alleged anticompetitive behavior was sufficient to support its UCL claim, according to the court. Link alleged that Cisco misled consumers by misclassifying equipment sold on the secondary market "used" simply because it had previously been owned or sold. Cisco considers its equipment "used" once it is sold to an unauthorized reseller, but not when identical equipment is sold to an authorized reseller. Using the word "used" this way was likely to mislead consumers; whether or not a product is "used" is not normally understood to depend on who it has been sold to and Cisco’s definition of the term ‘used’ is buried deep in its website, under an ‘FAQ’ section, which is insufficient to set a reasonable consumer straight.

The court also rejected Link’s request for "restitutionary disgorgement" under the UCL because Link does not have an ownership interest in the money that it alleged Cisco unfairly obtained. That money came from Link’s would-be customers.

The case is No. 3:18-cv-07576-CRB.

Attorneys: Lyndsey C. Heaton (Sideman & Bancroft LLP) for Cisco Systems Inc. and Cisco Technology, Inc. Justin Nathanael Owens (Stradling Yocca Carlson & Rauth) for Link US, LLC and Basem Toma.

Companies: Cisco Systems Inc.; Cisco Technology, Inc.; Link US, LLC

MainStory: TopStory StateUnfairTradePractices CaliforniaNews

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