Antitrust Law Daily Wrap Up, ANTITRUST—E.D. Tex.: Court disposes of Dexon and Cisco objections to magistrate recommendations about fear tactics, tying, (Jan 19, 2024)

By Justin Marcus Smith, J.D.

The court disagreed with Cisco that allegations about fear, uncertainty, and doubt (FUD) tactics amounted to a false advertising claim legally capable of supporting Dexon’s monopolization claims, while Dexon failed to address a main point about tying harm.

In continuing litigation between Dexon Computer, Inc. and Cisco Systems, Inc., a federal district court in Texarkana, Texas overruled the parties’ respective objections to adoption of a magistrate judge’s recommendation that the court partially grant and partially deny defendant Cisco’s motion for summary judgment. The court separately held the magistrate judge’s in limine rulings left Cisco the possibility of introducing some extraneous evidence of counterfeiting, if any, to put on its defense in a way that would not prejudice Dexon (Dexon Computer, Inc. v. Cisco Systems, Inc., January 17, 2024, Schroeder III, R.).

Background. In 2020, Internet networking equipment purveyor Cisco Systems, Inc. sued Dexon Computer, Inc. in the Northern District of California federal court, alleging Lanham Act claims that Dexon sold counterfeit Cisco products. Dexon is a value-added reseller that resells and services new or refurbished equipment of various manufacturers, including Cisco. Dexon's answer included trademark, tort, and antitrust counterclaims. After two dismissals and repleadings by Dexon of its counterclaims, the California federal court gave Dexon final leave to replead a third time. In its repleadings, Dexon did not reassert its antitrust counterclaims, but the California case otherwise remained pending.

The day Dexon filed its third amended answer, it also filed the instant suit asserting Sherman Act antitrust claims against Cisco in the Eastern District of Texas. Cisco and co-defendant CDW Corporation moved to transfer the case to the Northern District of California and to dismiss the case. The motions were referred to a magistrate judge, whose Report and Recommendations (R&R) found that the defendants' motions to transfer should be denied.

With respect to the magistrate judge’s 150-page R&R concerning motions to dismiss and cross-motions for summary judgment, CDW moved to withdraw. The court granted CDW’s motion to withdraw and, applying de novo review, overruled Dexon’s and Cisco’s objections to adoption of the R&R. The court also denied those portions of CDW’s motion to dismiss that were not confined to CDW and granted in part and denied in part the defendants’ motions for summary judgment.

Cisco objections. The court held the R&R correctly found a genuine issue of material fact existed as to whether Cisco engaged in anticompetitive conduct. The court agreed with the magistrate that Dexon’s allegations that Cisco used fear, uncertainty, and doubt (FUD) tactics, to foreclose competitive purchases and maintain supracompetitive pricing, were legally capable of supporting Dexon’s monopolization claims. More specifically, the FUD Dexon alleged did not, as Cisco had argued, strictly constitute a false advertising claim which could not be used to show antitrust conduct under Stearns Airport Equip. Co. v. FMC Corp., 170 F.3d 518 (5th Cir. 1999), as clarified by Retractable Techs., Inc. v. Becton Dickinson & Co., 842 F.3d 883 (5th Cir. 2016). Cisco did not adequately analogize advertising to personal and direct communication with customers.

The court said Dexon pointed to at least one instance of alleged FUD where it did not have an opportunity to respond, but even if Dexon failed to identify a single customer it did not counter, the R&R would still have correctly rejected Cisco’s attempt to frame all of its customer-specific and private communications to potential customers as mere “direct-to-consumer advertising.” The alleged FUD was broader than just threats of unspecified legal action. Dexon contested whether the alleged vague FUD statements were capable of being verified or disproven. The court declined to further evaluate whether any vague Cisco statements were true or false.

The court also rejected Cisco’s argument that the R&R contained legal error in evaluating alleged FUD about Dixon with other alleged conduct, like tying. The court said the R&R did not conflate the differing allegations, but even it had done so with respect to damages, it did not necessarily evaluate them together with respect to liability. The alleged software audit and bait-and-switch conduct were independent reasons not to grant summary judgment. As to software audits, Cisco contended that Dexon’s software audit allegations could not serve as evidence to support Dexon’s monopoly claims. Even if Cisco was right that the audits were “scant,” the court held the R&R correctly found alleged software audits could serve as evidence, and a genuine issue of material fact existed, with respect to Dexon’s § 2 Sherman Act claim.

As to conduct similar to tying, even assuming Cisco’s contentions that it could not support Dexon’s monopoly claims, and that it must be separately analyzed, Cisco failed to show R&R error with respect to allowing Dexon to introduce evidence with probative value.

As to antitrust injury, Cisco objected there was no genuine issue of material fact. Specifically, Cisco argued Dexon did not show any evidence of an interbrand original equipment manufacturer (OEM) rival that lost a sale because of any Cisco conduct or that such lost sale injured Dexon. Cisco also contended Dexon’s argument was illogical because Dexon’s damages theory meant Dexon would have sold even more Cisco equipment but for Cisco’s alleged conduct. The court said it ultimately agreed with Dexon’s arguments, and the R&R’s findings, that antitrust injury was presumable at this stage, where Dexon raised a genuine issue of material fact about anticompetitive harm to Dexon.

Dexon objections. The court agreed with the R&R that Dexon did not supply any evidence for its expert assertion about market wide harm in connection with a specific third party service provider, Park Place. Turning to Dexon’s objection about antitrust injury, the court concurred with the R&R’s conclusion there was not enough evidence to infer that bait-and-switch tying caused any per se tying antitrust injury congruent with Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 464 n.9 (1992). The court found Dexon did not dispute the magistrate judge’s recitation of the elements of a per se tying claim in the Fifth Circuit or that it must show anticompetitive effects in the tied market. Dexon focused here on facts related to the so-called West Penn incident. In the court’s view, Dexon’s arguments about West Penn did not address the R&R’s main point that Dexon failed to show Cisco tying harm to Dexon.

In limine rulings. In a separate written opinion, the court ruled the findings and conclusions of the magistrate’s motion in limine order were not clearly erroneous or contrary to law. The court said Cisco could still seek to introduce evidence of Dexon counterfeit sales, if any, by laying a foundation at trial, approaching the bench, or asking for leave of court outside the hearing of the jury. All in all, the court construed the MIL order as preventing Dexon from excluding all evidence of counterfeiting, if any, while allowing Cisco the possibility of introducing at least some such evidence, while limiting unfair prejudice. Cisco’s objections failed because Cisco did not show how the MIL order was a final evidentiary ruling clearly erroneous or contrary to law.

The Case is No. 5:22-cv-00053-RWS-JBB.

Attorneys: David Reichenberg (Manatt Phelps & Phillips LLP) for Dexon Computer, Inc. Aaron M. Panner (Kellogg, Hansen, Todd, Figel & Frederick, P.L.L.C.) for Cisco Systems, Inc. James Arthur Reeder, Jr (Jones Day) for CDW Corp.

Companies: Dexon Computer, Inc.; Cisco Systems, Inc.; CDW Corp.

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