Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Dell Alleges Price Fixing Conspiracy Among Optical Disk Drive Manufacturers, (May 14, 2013)

By Tobias J. Gillett, J.D., LL.M.

Dell Inc. has filed a complaint in the federal district court in Austin, Texas, alleging that manufacturers of optical disk drives (ODDs) engaged in a conspiracy to fix the prices for ODDs and to rig bids submitted to Dell (Dell Inc. v. Hitachi-LG Data Storage, Inc., May 13, 2013).

Dell is an information technology company offering a wide range of computer products and services. ODDs are internal or external drives that read optical discs, such as CDs, DVDs, Blu-ray discs, or HD-DVDs, by means of a laser. Dell purchases ODDs from ODD manufacturers to incorporate into its products. According to the complaint, the United States Department of Justice is investigating price fixing in the ODD market, and has entered into a plea agreement with Hitachi-LG Data Storage, Inc. (HLDSI) in which HLDSI admitted it engaged in a conspiracy to price-fix ODDs and rig bids given to Dell.

The complaint describes the history of ODD development, from the development of the CD by Sony Corporation and Koninklijke Philips Electronics N.V., to the development by a consortium of manufacturers of the DVD, and finally to the development of HD-DVD and Blu-ray formats by Toshiba Corporation and Sony, with Blu-ray winning out. According to Dell, the structure of the market thus developed is conducive to collusion.

Dell describes the ODD market as "highly concentrated," with the defendants and their co-conspirators controlling more than 90% of the market. The defendants allegedly formed various strategic alliances and joint ventures with each other to mitigate the costs of royalty payments, permitting the defendants to force second-tier manufacturers, which would have had lower labor costs, out of the market.

Moreover, the complaint notes the barriers to entry presented by the costs of building efficient manufacturing plants and overcoming technological hurdles, and by the intellectual property assets possessed by the defendants and their co-conspirators. The defendants belong to patent pools that allegedly deter entry to the market by charging high licensing costs for patent rights on technology required to produce ODDs. The defendants also allegedly discussed and exchanged information about the pricing and production of ODDs at various trade association meetings. Further, ODDs are a standardized product, with a high degree of substitutability among suppliers and purchase decisions made largely on price.

Dell alleges that the defendants reached agreements to stabilize the prices for ODDs through various meetings, discussions, and communications. Dell notes HLDSI’s guilty plea to price fixing in the Justice Department’s lawsuit, in which HLDSI admitted to conspiring to rig bids for Dell ODD negotiations. The complaint lists a number of alleged communications from and between the defendants and their co-conspirators in which they conducted their price-fixing conspiracy and exchanged sensitive information.

The complaint also observes that the ODD market did not behave as would be expected for a consumer electronics market, with "unnatural price stability and certain periods of upward pricing trends" replacing the expected downward pricing trends. The complaint also cites the alleged "long history of collusion" by many of the defendants in other technology-related markets, including the markets for magnetic videotapes, optical discs, gas insulated switchgears, DRAM, SRAM, cathode ray tubes, and thin-film transistor-liquid crystal displays (TFT-LCDs).

Dell alleges that the defendants’ fraudulent concealment of their conspiracy prevented Dell from discovering the conspiracy earlier, and would toll the statute of limitations on the defendants’ anticompetitive conduct.

Dell asserts claims for violation of Section 1 of the Sherman Act based on the defendants’ conduct in engaging in the price-fixing conspiracy to fix, raise, stabilize, and maintain prices for ODDs; rigging bids at OEMs’ procurement events, including those conducted by Dell; sharing confidential information that facilitated price coordination; entering into cooperation agreements pursuant to which ODD prices were set; and allocating customers and markets. The complaint also asserts claims for breach of a contract between Dell and HLDSI and Hitachi-LG Data Storage Korea Inc., and for breach of a contract between Dell and Toshiba Corporation and Toshiba Samsung Storage Technology Corporation.

The complaint names as defendants Hitachi-LG Data Storage, Inc., Koninklijke Philips Electronics N.V., Lite-On IT Corporation of Taiwan, BenQ Corporation, Sony Corporation, NEC Corporation, Toshiba Corporation, Samsung Electronics Co. Ltd., Toshiba Samsung Storage Technology Corporation, and related corporations. Dell requests damages and treble damages under the antitrust laws, compensatory damages for breach of contract, injunctive relief against further continuance of the conspiracy, interest, attorneys’ fees and costs, and any other relief to which it may be entitled.

The case is No. 1:13-cv-00393-SS.

Attorneys: Jon G. Shepherd (Alston & Bird LLP) for Dell Inc.

Companies: Dell Inc.; Hitachi-LG Data Storage, Inc.; Philips & Lite-On Digital Solutions Corp.; Koninklijke Philips Electronics N.V.; Lite-On IT Corporation of Taiwan; BenQ Corporation; NEC Corporation; Sony Corporation; Toshiba Corporation; Samsung Electronics Co. Ltd.; Toshiba Samsung Storage Technology Corporation

News: Antitrust