Antitrust Law Daily Wrap Up, ANTITRUST—N.D. Cal.: Avago must defend Funai’s monopolization claim, (Mar 28, 2017)

By Mark Engstrom, J.D.

Funai Electric Company and three of its subsidiaries could proceed with a Sherman Act monopolization claim against Avago Technologies, LSI Corporation, and Agere Systems, the federal district court in San Francisco has ruled. The defendants allegedly lied to the Institute of Electrical Electronics Engineers (IEEE) and the International Telecommunications Union (ITU) when they promised to license—on fair, reasonable, and non-discriminatory (FRAND) terms—three standard-essential patents on technologies that involved Internet connectivity and video compression. The plaintiffs complained that the defendants would not license standardized technology unless the plaintiffs paid exorbitant royalties and took licenses for other patents that were either invalid or irrelevant to their products. Because the Noerr-Pennington Doctrine did not bar the monopolization claims, and because the plaintiffs had adequately alleged a causal antitrust injury, dismissal of the Sherman Act claim was not warranted (Funai Electric Company, Ltd., v. LSI Corp., March 27, 2017, Freeman, B.).

Funai Electric Company, Funai Corporation, Funai Service Corporation, and P&F USA (collectively, "Funai") sued LSI Corporation, Agere Systems, and Avago Technologies General IP (Singapore) Pte. Ltd. for unlawful monopolization under Section 2 of the Sherman Act, violation of California’s Unfair Competition Law, and other violations of California law. According to Funai, the defendants had promised the IEEE and the ITU that they would license any standard-essential patents on FRAND terms if the standard-setting organizations (SSOs) incorporated the defendants’ technologies into their standards for wireless Internet connectivity (WLAN, WI-FI, and 802.11) and video compression (H.264 and MPEG-4 Part 10, or "AVC"). The defendants had no intention of honoring that commitment, Funai alleged, and refused to offer FRAND licensing to Funai for three standard-essential patents. Moreover, the defendants sued Funai for the infringement of those patents. Funai responded by suing the defendants under the Sherman Act and California state law. The defendants sought dismissal based on the Noerr-Pennington Doctrine and an alleged lack of a "causal antitrust injury."

Noerr-Pennington Doctrine. The crux of Funai’s antitrust claim its assertion that the defendants had lied to two SSOs—the IEEE and ITU—to induce them to incorporate the defendants’ technologies into the 802.11 standard for wireless Internet connectivity and the H.264 standard for video compression. More specifically, Funai alleged that: (1) the defendants had promised to license their standard-essential patents on FRAND terms if their technologies were incorporated into the SSOs’ standards; (2) the defendants had no intention of meeting that commitment; (3) the defendants’ technologies were incorporated into the 802.11 and H.264 standards; and (4) the defendants refused to license their standard-essential patents to Funai on FRAND terms.

Funai summarized the alleged monopolization scheme as follows: "Defendants’ objective during the IEEE’s and ITU’s consideration of the relevant input technologies was first to cause those technologies to be standardized through their advocacy for their adoption and simultaneous deceit, and then to take advantage of the lock-in effect by demanding exorbitant royalties or other license terms that were unfair, unreasonable, and/or discriminatory, which objective was flatly inconsistent with their prior explicit FRAND undertaking to the IEEE and ITU."

In the court’s view, Funai’s allegations were sufficient—separate and apart from its allegations about the defendants’ actions before the United States International Trade Commission (the "ITC Action") and the U.S. District Court for the Central District of California (the "District Court Action")—to plead a monopolization claim under Section 2 of the Sherman Act.

Funai also alleged that the defendants had filed the ITC Action and the District Court Action as "part of their overall anticompetitive scheme and in an attempt to effectuate the hold-up power that Defendants enjoy as a result of their concealment of their true intention not to offer FRAND terms to all those implementing the standards," despite their prior written commitment to the contrary. Because the ITC Action and the District Court Action were part of a larger anticompetitive scheme, Funai argued, the court could consider those actions when it evaluated Funai’s monopolization claim—without running afoul of the Noerr-Pennington Doctrine—irrespective of the doctrine’s "sham" exception.

Neither the Supreme Court nor the Federal Circuit has addressed that precise issue, the court explained, but another court in the Northern District of California had. In Hynix Semiconductor Inc. v. Rambus, Inc., 527 F.Supp. 2d 1084 (N.D. Cal. 2007), the presiding court concluded that, before an "otherwise protected" litigation could be a part of an "anticompetitive scheme" claim, the court had to conclude that "other aspects of the scheme independently produce[d] anticompetitive harms." If they did, the court had to determine whether the accused patent litigation was causally connected to the anticompetitive harms. If it was, the antitrust plaintiff could include the good-faith patent litigation as part of its anticompetitive scheme. The Hynix court reasoned that an antitrust plaintiff should be entitled to a "full recovery" when a patent litigation was used to further harm that was caused under a "more traditional" theory of antitrust.

The court in this case noted that some courts followed the Hynix decision but other courts disavowed it. It was persuaded, however, by the reasoning in Hynix, and thus joined the courts that followed it.

In the first step of the Hynix inquiry, the court concluded that Funai had adequately alleged that the non-petitioning aspects of the defendants’ alleged scheme—the false FRAND commitments—had independently caused an anticompetitive harm to Funai. In the second step, the court concluded that the ITC Action and the District Court Action were causally connected to that harm because both actions were mechanisms that the defendants had used to: (1) maintain the monopolies that they had obtained through misconduct before the SSOs and (2) effectuate the defendants’ "hold-up power" to demand supra-competitive royalties.

Moreover, the ITC Action and District Court action increased Funai’s costs of competing in the markets for 802.11-compliant and H.264-compliant products, the court observed, because those actions required Funai to expend significant resources to defend them. For those reasons, the court could consider the ITC Action and the District Court Action as part of the defendants’ alleged anticompetitive scheme.

Antitrust injury. Funai allegedly incurred an anticompetitive injury from the defendants’ monopolization of the Input Technology Markets because: (1) reasonable substitutes for the defendants’ technologies were excluded; (2) the defendants refused to license their technologies to Funai on FRAND terms, and (3) the defendants forced Funai to expend significant resources, including attorneys’ fees and other expenses, in defending the ITC Action and the District Court Action.

In addition, Funai alleged that competition had suffered a broader harm because the defendants’ wrongful conduct had brought—and continued to threaten—a significant potential for injury to "downstream price, quality, and innovation competition for devices that connect wirelessly to the Internet," or injury to "third party products that decompressed digital video streams," thereby causing an injury to consumers. Funai added that the threatened injuries included "the inevitable passing on to consumers of improper royalties demanded by Defendants and decreases in innovation and quality competition for end products that comply with the 802.11 and H.264 standards."

Because another court in the Northern District of California had already found that similar allegations were sufficient (Apple Inc. v. Samsung Electronics Co., No. 11-CV-01846-LHK (N.D. Cal. Oct. 18, 2011)), the court denied the defendants’ motion to dismiss the monopolization claim for failure to allege a causal antitrust injury.

The case is No. 16-cv-01210-BLF.

Attorneys: David A. Mancino (Baker & Hostetler LLP) for Funai Electric Company, Ltd.; Funai Corporation, Inc.; P&F USA, Inc.; and Funai Service Corp. David E. Sipiora (Kilpatrick, Townsend and Stackton, LLP) for LSI Corp. and Agere Systems LLC.

Companies: Funai Electric Company, Ltd.; Funai Corporation, Inc.; Funai Service Corp.; P&F USA, Inc.; LSI Corp.; Agere Systems LLC; Avago Technologies General IP [Singapore] PTE Ltd.

Cases: Antitrust CaliforniaNews