Antitrust Law Daily Wrap Up, ANTITRUST—M.D.N.C.: Nutrient efficiency company proceeds with anticompetitive counterclaims against patent holder, (Oct 1, 2015)

By Greg Hammond, J.D.

A nutrient efficiency company has stated valid exclusive dealing, monopolization, steering, and sham litigation counterclaims against the patent holder of a product containing n-butyl thiophosphoric triamide (NBPT). The federal district court in Greensboro, North Carolina, denied the plaintiffs’ motion to dismiss the company’s anticompetitive counterclaims, finding sufficient facts were pleaded to support the claims (Koch Agronomic Services, LLC v. Eco Agro Resources LLC, September 29, 2015, Osteen, W.).

Koch Agronomic Services, LLC filed a patent infringement suit against nutrient efficiency company Eco Agro Resources, LLC, alleging that Eco directly infringed its patent by making, using, selling, offering to sell, and/or importing, without Koch’s authority, products including urease inhibitors comprising NBPT in solvents including propylene glycol and dimethyl sulfoxide. Eco filed 10 affirmative defenses, including inequitable conduct and patent misuse, as well as 12 counterclaims that can be categorized into two groups: (1) allegations of anticompetitive conduct, including exclusive dealing, monopolization, steering, and patent misuse, in violation of the Sherman and Clayton Acts; and (2) allegations of state tort liability, including unfair and deceptive practices, tortious interference with prospective business contracts or relationships, commercial disparagement, and defamation. Koch moved to strike the inequitable conduct and patent misuse defenses and to dismiss the counterclaims.

Inequitable conduct. The court first concluded that Eco sufficiently pleaded circumstances of alleged misrepresentation to the U.S. Patent and Trademark Office (USPTO). Specifically, Eco claimed: (1) the co-inventor of Koch’s product Agrotain prepared an affidavit misrepresenting that propylene glycol stabilized NBPT; and (2) Eco has conducted testing and knows the results of third-party’s tests showing propylene glycol does not provide long-term stabilization of NBPT, which is contrary to the co-inventor’s affidavit. The court determined that the pleadings suggested an inference that because propylene glycol does not stabilize NBPT under their testing, the co-inventor could not show that that propylene glycol stabilized NBPT, and would have known the tests would not support his statements. In addition, the court found that prior denial of the patent at issue provided circumstances suggesting a deliberate decision to make a knowingly false misrepresentation to the USPTO.

Patent misuse. In support of its patent misuse defense, Eco alleges that in light of misrepresentations made to the USPTO that led to the issuance of the patent at issue, as well as prior art subsequently discovered in European Patent Office proceedings, no reasonable litigant could realistically expect success on the merits in the current infringement litigation. In addition, Eco asserts that the instant infringement action is an attempt by Koch to interfere directly with the business relationships of Eco and to further monopolize the market for stabilized nitrogen fertilizers. The court found these allegations sufficient to assert a patent misuse defense and consequently denied the motion to strike.

Relevant market. The court next found that Eco sufficiently alleged a relevant product market (the market for the sale of stabilized nitrogen fertilizers) and relevant geographic market (the United States). According to the court, Eco provided a sufficient explanation for why other products outside of the stabilized nitrogen fertilizer market are not reasonable substitutes for consumers, in that slow release fertilizers are typically two-to-four times greater in cost than untreated urea, whereas stabilized nitrogen fertilizers are typically only 10 or 20 percent greater in cost than untreated urea.

Exclusive dealing. Allegations that (1) the stabilized nitrogen fertilizer market is a relevant market; (2) NBPT is an important ingredient within the relevant product market; (3) Koch established an exclusive supply agreement with the sole supplier of NBPT in the United States; (4) NBPT is difficult to transport, making contracting with other suppliers expensive; and (5) Koch now controls 80 percent of the stabilized fertilizer market due, in part, to the exclusive supply agreement, were sufficient to state a plausible claim of exclusive dealing under Section 1 of the Sherman Act. Koch’s arguments to the contrary were inappropriate because the court could not look outside of Eco’s complaint to conduct a market analysis. The exclusive dealing claim under the Clayton Act, however, was dismissed because Section 3 liability only attaches to the sellers in an exclusive dealing contract, and Koch was the buyer.

Monopolization. Eco has also sufficiently alleged monopolization, the court found. Specifically, Eco claimed that Koch controls 80 percent of the stabilized nitrogen fertilizer market and has acquired and maintained that monopoly power through acquisition of Agrotain, the exclusive supply agreement, and bad faith enforcement of its patent that it purportedly knows to be invalid. The court found that maintenance of monopoly power through exclusionary means, like acquiring a company to consolidate control over a market, is prohibited under the Sherman Act, and Eco’s allegation concerning the acquisition of Agrotain can proceed on that theory.

Koch’s claims that Eco did not have standing to assert its Sherman Act claims also failed. Eco claimed that the anticompetitive conduct, including the exclusive supply relationships and acquisitions, made market entry more difficult for competitors like Eco. The court determined that, assuming this allegation is true, the injury that Eco claims of is plainly an injury to competition that the antitrust laws were intended to forestall. Eco therefore adequately pleaded antitrust injury to have standing under the Sherman Act.

Steering. Eco also claimed that Koch “steered at least one purchaser who sought to purchase the stabilized nitrogen product Agrotain from [Koch] to instead purchase stabilized nitrogen fertilizer products from Helena,” a competitor. The court concluded that Eco set forth adequate facts to support a reasonable inference of an agreement or conspiracy between Koch and Helena, because Eco had additionally claimed that Helena’s entrance into the market caused prices to drop, and that the prices have been stable or risen since Helena and Koch settled their lawsuit and allegedly began steering customers.

Sham litigation. Eco’s final counterclaim, sham litigation, was also adequately pleaded, the court concluded. Eco alleged that the current patent infringement litigation that Koch brought was an attempt to interfere directly with the business relationships of Eco and a competitor, and that Koch was attempting to preclude Eco entirely from the market for stabilized nitrogen fertilizers, which would result in fewer choices for consumers and potentially higher prices. The court rejected Koch’s arguments that there was no independent cause of action for sham litigation and that it was merely an exception to the Noerr-Pennington immunity. Rather, the court noted that the Supreme Court has long found the alleged enforcement of a patent procured by fraud states a claim under Section 2 of the Sherman Act, and that the allegations in this case were sufficient to allege the current litigation was objectively baseless and made in bad faith.

The case is No. 1:14CV679.

Attorneys: John F. Morrow, Jr. (Womble Carlyle Sandridge & Rice, PLLC) for Koch Agronomic Services, LLC. David Matthew Wilkerson (Van Winkle Buck Wall Starnes & Davis, P.A) for Eco Agro Resources LLC.

Companies: Koch Agronomic Services, LLC; Eco Agro Resources LLC

Cases: Antitrust NorthCarolinaNews