A Texas court dismissed an implementer’s antitrust claims against a pool of patent owners for failing to establish antitrust injury and standing to sue. Although the claims alleged that the patent owners failed to comply with their obligation to license standard essential patents on fair, reasonable, and non-discriminatory (FRAND) terms to third parties, any resulting harm was to the third parties, not the plaintiff. The court noted that if the patent owners violated FRAND obligations, the nature of such violations was a breach of contract, and not a violation of the antitrust laws. The court further noted that (1) because the implementer was able to obtain a license outside the patent pool, any pooling agreements were not an unreasonable restraint on trade to the plaintiff; (2) the implementer’s inability to obtain FRAND licenses did not harm its competitive position because its sole use for the patents was to produce its systems for the OEMs, which it could still do since the patent owners were actively licensing the patents to the OEMs; and (3) while non-FRAND licenses to OEMs may be considered increases in price that could constitute an antitrust injury, that injury would be to the OEMs and not to the implementer because the implementer did not even allege in its complaint that those higher prices would be passed on to it.
A number of companies, including Avanci, Nokia, Conversant, Optis, and Sharp, own standard essential patents (SEPs) for 2G, 3G, and 4G connectivity standards established by various Standard Setting Organizations (SSOs). Such SSOs often impose obligations on participating patent owners to license their patents to implementers on fair, reasonable, and non‑discriminatory (FRAND) terms and conditions.
Continental Automotive Systems produces components that comply with the 2G, 3G, and 4G uniform industry connectivity standards. It filed a lawsuit in the Northern District of California alleging the patent owners failed to meet their obligations to license their patents to Continental on FRAND terms and conditions. Continental also alleged the patent owners pooled their SEPs in a scheme to license them under non-FRAND terms and conditions only to original equipment manufacturers (OEMs).
Continental’s lawsuit alleged violations of Sections 1 and 2 of the Sherman Act, as well as breach of contract, promissory estoppel, and violations of California’s unfair competition law. The patent owners moved to transfer the case to the Northern District of Texas and asked the court to dismiss the case for lack of subject matter jurisdiction, lack of personal jurisdiction, and failure to state a claim. The California court agreed to transfer the case to Texas, and the Texas court subsequently dismissed the case.
Under Article III of the U.S. Constitution, Courts have subject matter jurisdiction to adjudicate “cases and controversies.” A plaintiff must have “standing to sue” to satisfy Article III, and that requires (1) an “injury in fact,” (2) a sufficient causal connection between the injury and the conduct complained of, and (3) a likelihood that the injury will be remedied by a favorable decision. Article III also requires that a matter be sufficiently “ripe” for a court to hear the case.
Here, the parties disagreed as to whether Continental fulfilled the “injury in fact” requirement and whether the action was “ripe.”
As to the injury in fact element, Continental argued the patent owners refused to license their SEPs to Continental under FRAND terms and would only provide non-FRAND licenses to OEMs that assembled the final product from components like Continental’s, which may in turn seek indemnification from Continental.
Because Continental did not allege that any OEMs entered into non-FRAND licenses or that they would even pass on the cost of those licenses to Continental through indemnification, the court found Continental did not sufficiently plead a non-speculative, concrete or imminent injury regarding the possibility of requiring to indemnify OEMs. Nonetheless, the court did find that Continental’s inability to obtain FRAND licenses to SEPs needed for its systems was a denial of property to which Continental was entitled to and caused injury in fact. As a result, Continental would have had to rely on the OEMs to obtain licenses, violate the law by infringing the SEPs, or abandon production of products using the standards.
Thus, there was an imminent and actual harm creating an injury in fact and the court denied the patent owners’ motion to dismiss for lack of Article III standing and ripeness.
The Foreign Trade Antitrust Improvement Act (FTAIA) limits subject matter jurisdiction over antitrust claims that involve trade with foreign nations unless the conduct pertains to imports or has a direct, substantial, and reasonably foreseeable effect on U.S. commerce. The patent owners argued the court lacked subject matter jurisdiction over Continental’s antitrust claims involving foreign patents, but the court disagreed, explaining that the case involved import of SEP licenses for foreign patents and the limitations under the FTAIA did not bar Continental’s claims. Thus, the court denied the patent owners’ motion to dismiss for lack subject matter jurisdiction under the FTAIA.
To adequately present a claim for an antitrust violation, Continental must plead antitrust standing which requires (1) injury-in-fact, which is an injury proximately or directly caused by Defendants’ conduct, (2) antitrust injury which is an injury of the type that antitrust laws were intended to prevent, and (3) proper plaintiff status which ensures other parties are not better situated to bring the action.
As for the injury-in-fact element, the patent owners argued that the possibility of Continental having to indemnify non-FRAND royalties paid by OEMs was not proximately caused by the patent owners. The court, however, explained that (as with Article III standing) Continental alleged injuries based on its inability to obtain FRAND licenses due to the patent owners’ agreement not to provide them. Thus, Continental’s injury is directly caused by the patent owners’ claimed misconduct.
As for the antitrust injury element, the court explained that the purpose of antitrust laws is to prevent restraints on trade that ultimately harms the consumer by restricting competition, increasing prices, and decreasing output. Here, Continental’s inability to obtain FRAND licenses did not harm its competitive position because Continental’s sole use for the SEPs is to produce its systems for the OEMs, which it could still do since the patent owners were actively licensing the SEPs to the OEMs. The court also explained that, while non-FRAND licenses to OEMs may be considered increases in price that could constitute an antitrust injury, that injury would be to the OEMs not to Continental since Continental did not even allege in its complaint that those higher prices would be passed on to Continental. Thus, Continental did not allege that it has suffered an antitrust injury to satisfy the antitrust standing requirement.
As for the correct plaintiff element, Continental must show that other parties are not better situated to bring suit based on whether (1) Continental’s injuries are speculative, (2) other parties have been more directly harmed, and (3) allowing Continental to sue would risk multiple lawsuits, duplicative recoveries, or complex damage apportionment. Here, Continental’s injuries were speculative because they depended on whether the OEMs would pass on extra costs of a non-FRAND license to Continental. Further, the OEMs were more directly harmed as they were forced to obtain SEP licenses on non-FRAND terms. Lastly, the risk of multiple lawsuits was less significant here because the complaint sought injunctive relief. Thus, Continental would not be the best plaintiff to bring the action.
As a result, the court granted the patent owners’ motion to dismiss Continental’s antitrust claims based on lack of standing.
The court explained that even if Continental had adequately alleged antitrust standing, it failed to allege an unlawful restraint of trade under Section 1 of the Sherman Act. Continental had to stablish that the patent owners (1) engaged in a conspiracy (2) that restrained trade (3) in a particular market. Here, Continental’s allegations of the patent owners’ agreement to pool their SEPs to license them only to OEMs under non-FRAND terms was not sufficient because they could license to non-OEMs at any price, irrespective of any agreement regarding licenses to OEMs. The court noted that a licensing pool’s agreement to establish royalty rates does not unreasonably restrain trade if customers have a realistic opportunity to obtain individual licenses outside of the pool. Thus, the pooled agreements were not an unreasonable restraint of trade on Continental and the court granted the patent owners’ motion to dismiss Continental’s claims for violation §1 of the Sherman Act.
As with Section, 1, the court explained that even if Continental had adequately alleged antitrust standing, it failed to allege an unlawful restraint of trade under Section 2 of the Sherman Act, which makes it unlawful to monopolize or attempt to monopolize, or conspire with others to monopolize. To show an unlawful monopoly, Continental had establish that the patent owners (1) possess monopoly power in the relevant market and (2) acquired or maintained that power willfully, as distinguished from the power having arisen and continued by growth produced by the development of a superior product, business acumen, or historic accident. Further, monopoly power is not unlawful unless it is accompanied by anticompetitive conduct (e.g. no business purpose other than to hurt competition).
In this case, Continental alleged that the patent owners abused their monopoly power from the standardization process by excluding implementers and extracting supra-competitive rates. The court disagreed. Just as a patent holder obtains a lawful monopoly to license a patent, an SEP holder obtains monopoly power through a standard, and the monopolies obtained by patent and SEP holders must be accompanied by illegal anticompetitive conduct to be unlawful. Violations of FRAND obligations are contractual, not antitrust, violations under Section 2 of the Sherman Act. Continental further argued that the patent owners obtained unlawful monopolies by making fraudulent FRAND declarations to the SSOs. While some courts have held such conduct to be anticompetitive, the court here disagreed. It found that the patent owners’ actions did not constitute anticompetitive conduct and granted their motion to dismiss Continental’s claims of unlawful monopolization under § 2 of the Sherman Act.
Because there was not complete diversity between Continental and the patent owners, the court explained it only had subject matter jurisdiction if there was federal question or supplemental jurisdiction. The court also explained that while disputes about FRAND licensing may involve federal questions of patent infringement, here Continental’s declaratory judgment claim dealt with the patent owners’ contractual FRAND obligations that did not raise a federal question. Thus, the court dismissed those claims. Regarding Continental’s contract, estoppel, and unfair competition state claims, the court declined to exercise supplemental jurisdiction and dismissed them as well.
When filing suit involving antitrust clams, in addition to considering the requirements necessary to establish an antitrust violation, Plaintiffs must plead sufficient facts to demonstrate it suffered an antitrust injury giving rise to antitrust standing. Considerations in that context include whether the party asserting the antitrust violation is the one suffering the antitrust injury, and whether the conduct qualifies as anticompetitive conduct. Interesting points on antitrust law from this court’s opinion in this case include the following:
The Continental decision can be found here.
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