Sonal Mittal Tolman
Wilson Sonsini Goodrich & Rosati
On November 17, 2017, Northern District of California District Court Judge Edward J. Davila dismissed the massive multidistrict tracking litigation against Facebook for the third and final time. In re Facebook Internet Tracking Litigation, No. 5:12-md-02314-EJD, 2017 WL 5525895 (N.D. Cal. Nov. 17, 2017). Judge Davila held the plaintiffs, who accused Facebook of tracking users’ browsing activity after they signed off, failed to identify any contract that prohibited such practices.
Plaintiffs alleged that Facebook tracked users’ web browsing activity across third-party websites while the users were logged out of their Facebook accounts. They originally asserted a variety of common law, tort, and statutory claims. After two earlier rounds of motions to dismiss in which the majority of the plaintiffs’ claims were dismissed with prejudice, plaintiffs filed their Third Amended Complaint which asserted claims for breach of contract and breach of the duty of good faith and fair dealing. 2017 WL 5525895, at *1-2.
Given that Plaintiffs’ failure to cure these defects in their complaint after multiple leaves to amend, Judge Davila dismissed the remaining claims in the action with prejudice. 2017 WL 5525895, at *6. Plaintiffs have since appealed the dismissal to the Ninth Circuit. In Re: Perrin Davis, et al., v. Facebook, No. 17-17486 (9th Cir. Dec. 15, 2017).
David M. Goldstein
In a decision that is sure to please patent assertion entities, on December 1, 2017, several Intellectual Ventures (IV) companies prevailed on summary judgment on antitrust counterclaims that Capital One asserted in response to a patent infringement suit filed by Intellectual Ventures I LLC and Intellectual Ventures II LLC in the district court in Maryland. Intellectual Ventures I LLC v. Capital One Financial Corp., No. 8:14-cv-00111-PWG, Memorandum and Opinion, ECF No. 686 (D. Md. Dec. 1, 2017). Although the court said that it found that Capital One had identified admissible evidence establishing a genuine issue of fact as to whether IV possesses monopoly power in a relevant market and whether IV had willfully acquired or maintained any such power, the court concluded that Capital One’s claims were barred by the Noerr-Pennington doctrine and collateral estoppel. The court’s opinion is a helpful addition to court decisions and academic scholarship regarding non-practicing entities and so-called “cluster markets,” as well as the application of Noerr-Pennington immunity and collateral estoppel in the context of antitrust counterclaims in patent infringement litigation.
IV is a non-practicing entity that attempts to generate revenue by licensing patents that it owns. The dispute in this case arose from IV’s efforts to license a portfolio of its financial services patents to Capital One. When the parties were unable to reach agreement on a license, IV sued claiming Capital One infringed five of its patents but it later withdrew one of the patents and proceeded on four patents. A court-appointed Special Master held that two of the four remaining patents claimed subject matter that is patentable under 35 U.S.C. § 101, but the court subsequently ruled that all four patents did not claim patentable subject matter—two patents because the court itself determined they did not, and two patents on the basis of collateral estoppel because another court had so determined. The court entered judgment for Capital One on all four of the remaining patents, and that ruling was upheld by the Federal Circuit, thus ending IV’s patent infringement claims against Capital One. Memo Op. at 2-3.
Meanwhile, Capital One had asserted three antitrust counterclaims against IV claiming monopolization and attempted monopolization under Section 2 of the Sherman Act, and unlawful asset acquisition under Section 7 of the Clayton Act. Capital One alleged that IV had tried to compel Capital One to license its patent portfolio, including the patents at issue in the case and in a separate case in Virginia. Intellectual Ventures I LLC v. Capital One Fin. Corp., No. 13-cv-740-AJT (E.D. Va.) (the “Virginia case”). After the court denied IV’s motion to dismiss Capital One’s antitrust claims, discovery ensued and IV then moved for summary judgment.
Antitrust Theories at Issue
Capital One asserted that IV is a patent troll that offers a portfolio license at “a jaw-dropping high price,” and then threatens to file patent litigation if the party does not take the license. Id. at 5. It characterized IV’s business model as (1) accumulating a vast portfolio of banking-related patents, (2) concealing the details of those patents, and then (3) serially litigating to force banks to take the portfolio license at an exorbitant price. Id. at 6. This conduct, according to Capital One, violates the antitrust laws.
IV responded that its patents are presumptively valid and that it lawfully acquired them. IV claimed that it offers to license its portfolio with an opening offer and expects the bank to counteroffer in a negotiation that will result in a mutually agreeable licensing fee. IV further argued that it does not conceal details of the patents or those details are publicly available. IV also asserted that Capital One is an “efficient infringer”—a company that willingly runs the risk of infringing patents on the theory that few patent holders will enforce their rights. IV argued that Capital One’s antitrust theory was flawed because it could not prove IV exercises monopoly power within a relevant market, and also that Capital One’s claims were barred by the Noerr-Pennington doctrine and collateral estoppel due to prior proceedings in the Virginia case. Id. at 6-8.
Disputed Issues of Fact Regarding Monopoly Power in a Relevant Market
The threshold antitrust issue concerned the parties’ disagreement regarding the proper definition of the relevant market—an issue the court ultimately declined to resolve on summary judgment.
Capital One argued “that IV possesses monopoly power in connection with its large financial services patent portfolio, which touches on essential technologies that commercial banks have heavily invested in and cannot realistically design around to avoid the reach of IV’s patents.” Id. at 9-10. Capital One’s expert, Professor Fiona Scott Morton, said that IV has approximately 7725 financial services patents. She maintained that applying an ex ante SSNIP analysis in this context would not be appropriate, and instead an ex post analysis of market power should be conducted because Capital One had already incurred costs to acquire technologies to compete with other banks. Id. at 10-11. She analogized IV’s financial services portfolio to a “cluster market” that IV promotes as a single product at a supracompetitive price. Id. at 11. She asserted that IV exercises monopoly power for that single product, even though no bank has licensed the entire portfolio and IV has not prevailed in any patent infringement suit against any bank. Id. at 11-12.
IV argued that Capital One is incorrect in defining the relevant market as a “cluster market” for financial services patents constituting a single product. Id. at 12. Its expert, Professor Richard Gilbert, argued that IV’s patents likely touch on a large number of distinct technology markets, each of which should be analyzed using a SSNIP test. Further, he argued, no such analysis could even be undertaken because no negotiations with banks ever resulted in a license and accordingly there was no transaction price for the alleged single product, and moreover IV had not successfully licensed its portfolio to any bank so there was no market price to analyze. Id. at 12-13.
The court criticized both Capital One’s and IV’s respective positions. It cited academic criticism of the notion of “cluster markets”, but also opined that IV’s contention that it would be economically feasible to determine whether there are close substitutes for thousands of patents to avoid IV’s portfolio “stretches plausibility to the near breaking point.” Id. at 13-16. Reflecting the difficulty of defining a relevant market in this context in light of dueling experts, the court stated that “even if the cluster market analysis ultimately is not the appropriate framework for analyzing the relevant antitrust market in cases such as this one . . . it is hard to deny that there is something concerning from an antitrust perspective about the way in which IV engages in its licensing business.” Id. at 18. Having expressed that concern, the court concluded that a genuine issue of fact existed as to the definition of the relevant market so that issue should be left to a jury, and it turned to IV’s defenses based on Noerr-Pennington immunity and collateral estoppel. Id. at 18-20.
IV maintained that its patent infringement case against Capital One was petitioning activity protected under the Noerr-Pennington doctrine, and therefore Capital One could not succeed on its antitrust counterclaims unless it could demonstrate that IV’s claims were “objectively baseless.” Id. at 20-21. Capital One countered that Noerr-Pennington immunity did not apply at all because IV’s “litigation conduct is part of a broader monopolistic scheme,” not just sham litigation as to the patent infringement claims against Capital One, and the doctrine does not insulate IV’s entire monopolization scheme. Id. at 21. The court rejected Capital One’s argument because it believed the sham litigation allegation was integral to Capital One’s entire theory of antitrust liability, and the court was unpersuaded that Noerr-Pennington immunity does not apply where the alleged sham litigation was just one part of an overall scheme to monopolize. Id. at 23.
Having determined Noerr-Pennington immunity was in play, the court then analyzed two possible exceptions: Walker Process fraud and sham litigation. The court quickly discharged Walker Process fraud because “there is no evidence that the Patent Office was tricked by fraud or that IV (which later acquired the patents) was aware of any such fraud, . . . .” Id. at 25. See Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 383 U.S. 172 (1965).
The court’s analysis of the sham litigation exception, which was much more involved, started with the fundamental principle that the exception is “narrow,” and “rarely will ‘a patentee’s assertion of its patent in the face of a claim of invalidity . . . be so unreasonable as to support a claim that the patentee has engaged in sham litigation.’” Id. at 26 (quoting Tyco Healthcare Grp. LLP v. Mut. Pharm. Co., 762 F.2d 1338, 1343 (Fed. Cir. 2014)). After explaining the claimed differences between sham litigation under Professional Real Estate Investors (available for a single patent infringement suit) and California Motor (claimed to be available for “a pattern of baseless, repetitive claims” regardless of the type of lawsuits), id. at 26-30, the court concluded that Federal Circuit law governed and therefore PREI applied (as IV had argued), rather than Fourth Circuit law under which California Motor could apply (as Capital One had argued). Id. at 31-35. See Professional Real Estate Investors, Inc. v. Columbia Pictures Indus., Inc., 508 U.S. 49 (1993) (“PREI”); Cal. Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508 (1972) (“California Motor”). The court also found that, in any event, IV’s two lawsuits in Virginia and Maryland against Capital One could not constitute a “series” of claims within the meaning of California Motor. Memo Op. at 33.
The court then applied PREI’s well-known test that a lawsuit qualifies as sham litigation when it “(1) is ‘objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits’ (the objective element), and (2) is motivated by a desire ‘to interfere directly with the business relationships of a competitor’ (the subjective element).” Id. at 28 (quoting Tyco Healthcare, 762 F.3d at 1343). The court then ticked through a host of reasons why, at least in its view, Capital One could not establish that IV’s lawsuit was “objectively baseless”—the most important being that IV had prevailed on two of its patents before the Special Master. In addition, however, the court said that (1) the patents were presumptively valid; (2) the suit was filed before the U.S. Supreme Court’s decision in Alice Corp. Pty. Ltd. V. CLS Bank Int’l, 134 S. Ct. 2347 (2014); (3) IV has not filed suits against Capital One post-Alice; (4) IV withdrew specific claims, suggesting it believed it could prevail on the others; (5) IV appealed summary judgment rulings; (6) IV incurred substantial litigation expenses; (7) IV obtained the patents from others and was entitled to rely on their presumptive validity; (8) in the parallel Virginia case the court ruled that IV’s lawsuit was not an “exceptional case” marked by “unreasonable conduct” that would justify an award of attorney’s fees; and (9) IV incurred significant expenses in designating nine experts on the objective reasonableness of the claims. Id. at 35-39. In any event, the court said, even if IV’s claims were objectively baseless, Capital One and IV are not competitors so the subjective element of the PREI test could not be met. Id. at 39.
IV also argued that defensive collateral estoppel blocked Capital One from pursuing claims it had unsuccessfully alleged against IV in the Virginia litigation, because that court had determined that the market in that case—the same market Capital One alleged in this case—was not a relevant market for antitrust purposes, and that ruling was critical and necessary for the Virginia court’s judgment. Capital One countered that collateral estoppel did not apply because in this case it alleged a materially different relevant market and, in any event, market definition was not critical or necessary to the judgment in the Virginia case because Capital One’s Virginia claims were rejected on multiple grounds. Id. at 39-41.
The court rejected Capital One’s argument that the relevant markets in the two cases were different. In addition to the fact that IV had not acquired new patents in the relevant investment funds since filing its antitrust counterclaims in the Virginia case, the court found that no company had licensed IV’s patent portfolio, which indicated there was in fact no market for it. Id. at 43-45. In short, there either was no market or it was the same in both cases. Although the court acknowledged that the lack of a relevant market in the Virginia case was only one of two alternative grounds for dismissal of Capital One’s antitrust claims, the court concluded that the issue of market definition in the Virginia case was “fully and fairly litigated,” and it therefore was appropriate to estop Capital One from re-litigating that issue in this case. Id. at 44-52.
The court’s opinion demonstrates some of the hurdles in advancing antitrust counterclaims against a patent assertion entity. Perhaps of greatest importance, the decision focused on the challenge of defining a relevant antitrust market in the context of a demand to license a portfolio of patents, even with the benefit of the views and analyses of two well-credentialed economists. More generally, the court’s decision to grant summary judgment based on Noerr-Pennington immunity (in particular its analysis of the sham litigation exception) and collateral estoppel provides antitrust counterclaim plaintiffs and defendants with useful guideposts for developing evidence to support their arguments. Of course, we have not have heard the final word yet. On December 28, 2017, Capital One filed its notice of appeal in the Federal Circuit.
Harrison (Buzz) Frahn, Caitlyn Chacon, Marissa Lambert
Simpson Thatcher & Bartlett LLP
On November 4, 2017, Judge Margo Brodie of the Eastern District of New York denied the North American Soccer League, LLC’s (“NASL”) request for a preliminary injunction blocking the United States Soccer Federation, Inc.’s (“USSF”) revocation of NASL’s Division II league status for the 2018 professional soccer season. NASL claimed that the preliminary injunction would resolve “the immediate prospect of being driven out of existence as a competitor,” while the court decided whether to grant declaratory relief and a permanent injunction striking down USSF’s Professional League Standards (“PLS”)—requirements and standards for professional soccer leagues seeking Division I, II, or III designation in the U.S. N. Am. Soccer League, LLC v. U.S. Soccer Fed’n, Inc., No. 1:17-cv-5495, 2017 WL 4159787, ¶ 12 (E.D.N.Y. Sept. 19, 2017) (“Cmpl.”). The crux of NASL’s complaint is that USSF adopted and applied the PLS in an anticompetitive manner as part of a conspiracy to entrench Major League Soccer (“MLS”), USSF’s business partner, as a monopolist in the relevant market for top-tier men’s professional soccer leagues located in the U.S. and Canada. Id. ¶ 4.
In denying the preliminary injunction, Judge Brodie determined that NASL established three of the essential factors for relief—irreparable harm, balance of hardships, and the public interest—but that it failed to demonstrate the fourth: a “clear showing” of entitlement to relief. N. Am. Soccer League, LLC v. U.S. Soccer Fed’n, Inc., No. 17-cv-05495 (MKB), 2017 WL 5125771, at *1 (E.D.N.Y. Nov. 4, 2017). With respect to this fourth element, the court found that the adoption and implementation of the PLS by USSF was not sufficient on its own to show concerted action under Section 1 of the Sherman Act. Id. at *10–11. Further, in applying a rule of reason analysis, the court held that USSF met its burden of offering evidence of PLS’ procompetitive benefits and that NASL failed to offer less restrictive alternatives. Id. at *18–20.
NASL, a professional men’s soccer league comprised of seven teams operating in the U.S. and Canada, asserted Section 1 and 2 Sherman Act claims against USSF, a membership organization of professional soccer leagues and the governing body for professional soccer in the U.S.
The Section 1 claim alleges that USSF “as part of a conspiracy with its membership,” adopted and applied the PLS to prevent NASL from competing with MLS as a Division I league and United Soccer League (“USL”) as a Division II league. Cmpl. ¶ 7. USSF’s application of the PLS allegedly ensure that MLS and USL each enjoy a monopoly in Division I and Division II, respectively, in violation of Section 2. Id. ¶ 6. The complaint defines the relevant product and geographic markets as (1) top-tier (i.e., Division I) and (2) second-tier (i.e., Division II) men’s professional soccer leagues in the U.S. and Canada. Id. ¶ 35.
According to NASL, USSF and MLS, as commercial business partners, mutually benefit from MLS’s Division I monopoly. To help preserve its monopoly status, MLS allegedly entered into commercial arrangements with USL whereby USL agreed to serve as MLS’s “reserve league, with no possibility of USL ever challenging MLS’s dominance in the top tier.” Id. ¶ 3. Pursuant to this arrangement, USSF used the PSL to deny NASL Division II status for the 2018 season, making USL the sole Division II league. Id. ¶ 6. Notably, while the complaint names only USSF as a defendant, it nevertheless identifies MLS, USL, and Soccer United Marketing, LLC (“SUM”)—an entity allegedly controlled by MLS—as USSF’s alleged co-conspirators.
USSF’s Opposition to Plaintiffs’ Motion for a Preliminary Injunction
USSF’s opposition contended that NASL was in fact seeking a mandatory injunction, not a preliminary one, and therefore a more stringent standard applied. Def. Opp., N. Am. Soccer League, LLC v. U.S. Soccer Fed’n, No. 1:17-cv-5495, at 4 (E.D.N.Y. Oct. 16, 2017). Whereas a preliminary injunction seeks to maintain the status quo, a mandatory injunction alters it, making it a more extreme form of relief. USSF explained that the status quo was not, as NASL claimed, NASL’s status as a Division II league, but rather the declination of that status by the USSF for the 2018 season. Because NASL sought an affirmative change to this status quo, the mandatory injunction standard of a “clear showing” of entitlement to relief was appropriate, rather than the less stringent “likelihood of success” standard applicable to a preliminary injunction. Id. at 12–13.
USSF further asserted that NASL’s allegations of concerted conduct fell short because they were premised only on the co-conspirators’ membership and participation in the USSF Board, which alone is insufficient. Id. at 15. USSF also outlined procompetitive effects of the PSL, such as promoting quality, enriching fan experience, and increasing public interest in professional soccer. Id. at 17–23. Finally, citing the Supreme Court case Texaco, Inc. v. Dagher, 547 U.S. 1, 7 (2006), USSF argued that the plaintiff “improperly target[ed] a core activity of USSF itself”: that of setting and applying the PLS. Def. Opp., N. Am. Soccer League, No. 1:17-cv-5495, at 18. USSF contended that the core standards enacted by a legitimate governing body, such as USSF, are lawful under Dagher, which established that where “the business practice being challenged involves the core activity of the joint venture itself,” the ancillary restraints doctrine, which governs “the validity of restrictions imposed by a legitimate business collaboration . . . on nonventure activities” does not apply. Id. The “core activity” at issue in Dagher was the pricing of a product produced and sold by the defendant joint venture. USSF did not elaborate on how the setting of the PLS was analogous to the pricing of a product, such that it too constituted a “core activity” of the venture, but simply stated that there was “no basis for the Court to second-guess the USSF’s core activities in organizing U.S. professional soccer.” Id. at 19.
The Court’s Denial of NASL’s Motion for a Preliminary Injunction
The district court denied the motion for a preliminary injunction on the grounds that NASL failed (i) “to demonstrate concerted action” required for a Section 1 claim and (ii) to meet the heightened standard of a mandatory injunction requiring a “‘clear showing’ of entitlement to relief based on the reasonableness of the restraint.” N. Am. Soccer League, LLC, 2017 WL 5125771, at *21.
To establish concerted action, an antitrust plaintiff must provide direct or circumstantial evidence of “a conscious commitment to a common scheme designed to achieve an unlawful objective.” Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 768 (1984). Judge Brodie rejected NASL’s claim that “the adoption and changes to the PLS are express agreements in and of themselves sufficient to satisfy concerted action prong of Section 1.” N. Am. Soccer League, LLC, 2017 WL 5125771, at *10. In doing so she cited the Second Circuit’s decision in AD/SAT, Div. of Skylight, Inc. v. Associated Press, 181 F.3d 216, 234 (2d Cir. 1999), in which the Associated Press (“AP”) was accused of violating Section 1 by conspiring to boycott plaintiffs’ business of electronically transmitting advertisements to newspapers. There, the Second Circuit declined to find concerted action based solely on “defendants’ status as members of the AP,” affirming that “every action by a trade association is not concerted action by the association’s members.” Id. To hold otherwise could result in “unwarranted regulation of legitimate conduct” and would undermine the principle that “an antitrust plaintiff must present evidence tending to show that association members, in their individual capacities, consciously committed themselves to a common scheme.” Id.
In a lengthy footnote, Judge Brodie acknowledged that “there may be cases where a by-law, rule, regulation, or standard is so clearly anticompetitive on its face to warrant a finding of an ‘agreement’ for purposes of section 1.” Id. at *10 n.28. The court distinguished NASL’s allegations from the facts at issue in Associated Press v. United States, 326 U.S. 1 (1945) and NCAA v. Bd. of Regents, 468 U.S. 85 (1984), which involved agreements between organizational members that on their face were “designed to preclude all competition or competitors.” N. Am. Soccer League, No. 1:17-cv-5495, at *23 n.28. The court affirmed that, at minimum, to establish concerted action, NASL was required to provide evidence “that there was an agreement to agree to vote a particular way, compromising each individual Board member’s independence.” Id. at *10. Judge Brodie contrasted NASL’s showing from the evidence of concerted action in the Fourth Circuit case North Carolina State Board of Dental Examiners v. FTC, 717 F.3d 359, 365 (4th Cir. 2013). There, the defendant board, which regulated the practice of dentistry in North Carolina, “met prior to voting, agreed on what action to take, and then formalized that action through a vote”—thus the “Board members had made an agreement to agree prior to the formal vote.” N. Am. Soccer League, LLC, No. 1:17-cv-5495, at *23 n.28.
The court went on to reason that even if NASL established concerted action, it failed to demonstrate an unreasonable restraint of trade under the rule of reason analysis, which involves a three-step burden shifting framework. Id. at *15. NASL satisfied the first step by establishing that USSF has sufficient market power to cause an adverse effect on competition. In making this finding the court upheld NASL’s proposed market definition, stating that given USSF’s “role as a standard-setting organization” it was logical to define the relevant markets along the same lines as USSF’s differentiation of Division I and Division II (i.e., top-tier and second-tier men’s professional soccer leagues located in the U.S. and Canada). Id. at *18. The court explained that under these circumstances, “industry recognition” may be especially relevant in defining the market as economic actors usually have accurate perceptions of economic realities. Id. at *17 (quoting Todd v. Exxon Corp. 275 F.3d 191, 205 (2d Cir. 2001)).
Because NASL satisfied the first step of the rule of reason analysis the burden shifted to USSF to offer evidence of the procompetitive effects of the alleged restraint—the PSL. USSF satisfied this burden by offering multiple justifications for the PSL, including that they promote quality, sustain fan interest, encourage investment by teams to discourage freeriding off of USSF and other organizations, and protect the financial viability of leagues. Id. at *18–19. The court stated that these justifications “provided plausible bases to conclude that the PLS have procompetitive effects.” Id. at *18. The burden then shifted back to NASL to prove that there are “less restrictive alternatives to the restraints at issue.” Id. at *19. Judge Brodie found that NASL failed to sustain this burden because it had “not expressly proposed any less restrictive alternatives other than the elimination of the parts of the PLS in dispute.” Id. at *20. Instead, NASL argued “that the standards are inherently anticompetitive, offering little to no procompetitive benefits, and that the free market itself is a better alternative.” Id.
In all, the court concluded that while it was “satisfied that the pleadings . . . demonstrated a plausible claim for relief,” NASL nevertheless failed to make a “clear showing” of entitlement to relief, as required for the injunction it sought. Id. at *21.
This district court decision provides guidance on how courts are viewing the conduct of trade associations and joint ventures entities in Section 1 cases. It also demonstrates the stringent standard plaintiffs face when seeking to enjoin a defendant’s conduct, as courts are typically loathe to intervene and disrupt parties’ conduct pending the outcome of an antitrust case.