By Nicole D. Prysby, J.D.
Allegations that licensors violated their contractual right to license standard-essential patents through FRAND obligations were inadequate to demonstrate restraint of trade and monopolization.
Claims that a licensing agent was created by cellular standard patent holders as part of a conspiracy to charge supra-fair, reasonable, and non-discriminatory (FRAND) royalties for various patents in the cellular communications industry failed for lack of antitrust injury, held the federal district court in Dallas, Texas. Continental Automotive Systems, Inc. claimed that Avanci, LLC, a licensing agent, was created by individual patent holders who wanted to preserve their ability to continue to extract supra-FRAND licensing revenues for patent licenses for cellular standards used as part of automotive telecommunications units. Continental failed to demonstrate antitrust injury, because it did not allege harm to its competitive position, since it did not allege that increased prices will be passed on to it. And even if it had adequately alleged antitrust injury, its restraint of trade claim would fail because to the extent the licensors refused to negotiate, this alleged at best parallel conduct and the possibility of concerted action, not an unlawful agreement to restrain trade. Continental’s monopolization claim would fail because a standard essential patent (SEP) holder may choose to contractually limit its right to license the SEP through a FRAND obligation, but a violation of this contractual obligation is not an antitrust violation (Continental Automotive Systems, Inc. v. Avanci, LLC, September 10, 2020, Lynn, B.).
The lawsuit at issue was brought by Continental, which manufactures telematics control units (TCUs) for vehicles. It sells TCUs to car manufacturers (OEMs) that use the TCUs to provide their cars various functionalities, including cellular connectivity. The company sought licenses for various SEPs associated with the 2G, 3G, and 4G cellular standards, and sued twelve companies (Defendant Licensors) that have committed to grant licenses to their SEPs on FRAND terms and conditions. In addition, Continental sued Avanci, a licensing agent for a large group of patent owners and traditional patent licensors, including the Defendant Licensors. Instead of separately obtaining licenses from each of the SEP holders, that company could obtain a collective license from Avanci to all of the SEPs held by Avanci’s members. Continental claimed that Avanci is a collusive vehicle formed by SEP holders who wanted to preserve their ability to continue to extract supra-FRAND licensing revenues. Continental alleged that the Defendants violated the Sherman Act and state law by colluding to extract supra-FRAND licensing revenues. The Defendants sought to dismiss all claims. In March 2020, the Department of Justice Antitrust Division filed a statement of interest in the case, asserting its position that breaches of FRAND commitments made during standard-setting processes "do not articulate cognizable antitrust claims."
Article III standing and ripeness, foreign patents. Continental had Article III standing to bring the claims, and the claims were ripe, the court held. Continental’s allegation that Defendants will only provide non-FRAND licenses to OEMs did not allege actual (or imminent) injury, because Continental did not allege that any OEMs with which it has entered into indemnity agreements have been or will likely be forced to take a non-FRAND license from Defendants or that the costs of those licenses will be passed onto it through indemnity obligations. However, Continental pleaded a sufficient injury based on its alleged inability to obtain from Defendants, on FRAND terms, SEP licenses needed for its TCUs. The court also held that it had subject matter jurisdiction under the Foreign Trade Antitrust Improvement Act over Plaintiff’s antitrust claims involving foreign patents. The FRAND obligations involve Defendants’ activities in global license and product markets, and their efforts to set prices within those markets. These global markets necessarily include U.S. markets, and Continental alleged direct, substantial, and reasonably foreseeable effects in the U.S.
Antitrust standing and injury. Continental demonstrated antitrust standing, because its alleged injuries include its inability to obtain FRAND licenses due to Defendants’ alleged agreement not to provide them. But Continental did not sufficiently allege antitrust injury, because it did not allege harm to its competitive position or its position as a consumer of products used in its devices. Continental did not allege that it has been unable to continue to produce and sell TCUs to the OEMs or that the OEMs cannot obtain SEP licenses from Defendants. To the extent that the OEMs pay non-FRAND royalties for those licenses, this increase in price may constitute an antitrust injury to the OEMs. But Continental did not sufficiently allege that those increased prices will be passed on to it. And even if an OEM’s antitrust injury could be imputed to Continental, Continental would not be the best plaintiff to bring this action. The claimed antitrust violations are directly felt by the OEMs, which are allegedly forced to obtain SEP licenses on non-FRAND terms. Continental is merely an indirect victim of the alleged scheme.
Restraint of trade and monopolization claims. Even if Continental had adequately alleged antitrust injury, its restraint of trade claim would fail. To the extent the Licensor Defendants refused to negotiate with Continental, this alleged at best parallel conduct and the possibility of concerted action, which are insufficient to state a claim of an unlawful agreement to restrain trade. Continental’s monopolization and conspiracy to monopolize claims would also fail. An SEP holder may obtain additional monopoly power through inclusion in a standard. This additional market power is inevitable as a very frequent consequence of standard setting, and is necessary to achieve the benefits served by the standard, including procompetitive benefits. It is not anticompetitive for an SEP holder to violate its FRAND obligations; an SEP holder may choose to contractually limit its right to license the SEP through a FRAND obligation, but a violation of this contractual obligation is not an antitrust violation. Continental alleged that Defendants obtained unlawful monopolies by making fraudulent FRAND declarations to the SSOs that induced the SSOs to include Defendants’ SEPs in their standards. But Defendants’ allegedly fraudulent FRAND declarations to the SSOs do not constitute anticompetitive conduct that can be the basis of a monopolization claim. Given that Defendants’ alleged conduct with respect to the SSOs and their FRAND obligations is not anticompetitive because such conduct does not harm the competitive process, any agreement to engage in that conduct cannot constitute a conspiracy to monopolize.
Having dismissed all of Continental’s federal claims, the court declined to exercise supplemental jurisdiction over Continental’s declaratory judgment, contract, promissory estoppel, and unfair competition claims.
This case is No. 3:19-cv-02933-M.
Attorneys: Stephen Korniczky (Sheppard Mullin Richter Hampton LLP) for Continental Automotive Systems Inc. Jeffrey L. Kessler (Winston & Strawn LLP) for Avanci LLC.
Companies: Continental Automotive Systems Inc.; Avanci LLC
MainStory: TopStory Antitrust GCNNews TexasNews
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