Antitrust Law Daily Wrap Up, ANTITRUST—NYSupCt: Converter Box Manufacturer’s State Antitrust Claims Fail Against Patent Pool, (Jun 19, 2013)

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

A manufacturer of digital-to-analog converter boxes failed to state antitrust counterclaims against a patent pool that licensed patents for converter box technologies under the antitrust laws of ten states, because it did not show an injury to competition, did not allege a conspiracy between two or more entities, and did not file its claims within the applicable statutes of limitations, a New York Supreme Court has ruled (MPEG LA, L.L.C. v. GXI Intl., LLC, June 10, 2013, Schweitzer, M.).

MPEG LA administers a patent pool for patents owned by a variety of technology companies. In 2008, GXI International, LLC entered into an agreement with MPEG to license certain patents for technology utilized in manufacturing converter boxes for converting digital television signals for use with analog televisions. In exchange, GXI would pay a royalty of $5.00 per unit that used the patents. Under federal rules, the maximum price for a converter box was set at $40.00.

MPEG filed suit against GXI and related defendants (“GXI”), alleging that GXI failed to pay the full amount of the royalties required under the contract. GXI filed counterclaims asserting that MPEG violated the antitrust laws of ten states through its monopoly power in the converter box market, by extending the power of patent pool participants in that market, by charging unreasonable royalties on converter boxes, by unreasonably charging royalties on consumer transactions in converter boxes prior to the transactions occurring, and by not adjusting the royalty rates when converter box prices fell. MPEG filed a motion to dismiss the counterclaims.

The court explained that New York’s Donnelly Act, as well as the antitrust laws of eight of the other states, are modeled on the Sherman Antitrust Act, and are interpreted with reference to it.

Relevant product market. GXI defined the relevant product market as “digital-to-analog converter boxes distributed from and after 2008 certified by NTIA as eligible for purchase with” a federally-issued coupon. Although the definition did not discuss the cross-elasticity of demand with other products, or discuss the geographic market, it was “not so general as to be ambiguous,” and it “seem[ed] to accurately describe the products at issue.” Since the license agreement was worldwide, there was “no reason to assume that the relevant market would be restricted,” and further narrowing could be accomplished through discovery. Therefore, the market definition did not warrant dismissal of the counterclaims, according to the court.

Restraint of trade. However, GXI failed to demonstrate an antitrust injury caused by harm to competition as a whole, the court found. The price of converter boxes was set at $40, and therefore the royalties did not affect the price of the boxes. Moreover, the price of converter boxes had fallen since 2009, and GXI did not identify any companies that had been deterred from entering the market due to the allegedly excessive royalties. Further, the allegation that patent pool members had an unfair advantage in the converter box market from receiving a portion of the royalties “merely allege[d] injury to some of the competitors, or, more accurately, an advantage to some of the competitors,” not an injury to competition.

Moreover, there was “no requirement that royalties be ‘reasonable,’ so long as they do not adversely affect competition,” and GXI did not allege facts that would show that the royalties affected competition in the converter box market. Nor was there any legal or contractual provision that would require MPEG to lower the royalty rate as converter box prices fell.

GXI also did not show that it could not have obtained individual licenses for the patents, despite GXI’s claim that doing so was economically impractical. The allegedly excessive royalties were “without legal significance” in the absence of market domination, and GXI did not allege facts that would support a finding that MPEG had dominated the converter box market. Moreover, GXI’s assertion that it was not economically feasible to obtain individual licenses did not satisfy its “burden to prove the nonavailability of alternatives,” nor did GXI show that it had made any attempt to obtain individual licenses.

Conspiracy or reciprocal relationship. GXI “also failed to allege a conspiracy between two or more entities,” and its memorandum of law did not address that failure. Therefore, it failed to state a claim for that reason as well.

Cartwright Act. GXI also failed to state a claim under California’s Cartwright Act, which was not modeled on the Sherman Act, because it “failed to plead that there was any conspiracy, or facts to support a conclusion that the acts alleged were illegal.”

Statute of limitations. The statutes of limitations for the state antitrust laws were all four years or less. According to the court, the counterclaims accrued on July 25, 2008, when the parties entered the licensing agreement, and were first asserted on January 15, 2013. Although an overt act could restart the statute of limitations, “continued implementation of a contract does not constitute an overt act.” As GXI did not allege any overt acts that would restart the statutes of limitations, the statutes barred GXI’s claims.

GXI’s contention that its cause of action did not accrue until its damages were no longer speculative also could not toll the statute of limitations, the court found. GXI did not allege when it could have determined the amount of its damages. Moreover, “[u]ncertainty about the amount of damages does not prevent recovery, unlike uncertainty as to whether there are damages.” As GXI’s “arguments seem[ed] to revolve around the amount of damages rather than the fact of damages,” GXI had not “adequately asserted an exception to the statute of limitations,” according to the court.

The case is No. 653689/12.

Attorneys: Craig P. Murphy (Windels Marx Lane & Mittendorf LLP) for MPEG LA, LLC Jon J. Witmeyer III (Ford Marin Esposito Witmeyer & Gleser LLP) for GXI Intl., LLC.

Companies: MPEG LA, L.L.C.; GXI International, LLC.

Cases: Antitrust NewYorkNews