Antitrust Law Daily Wrap Up, ANTITRUST—SDTex: Antitrust Claims Based on Allegedly Anticompetitive Patent Settlement Agreement Rejected, (Jun 12, 2013)

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

A manufacturer of oil and gas valves, actuators, and other flow control products has failed to state antitrust claims against a company with which the manufacturer entered into an agreement settling patent infringement claims, based on allegedly anticompetitive terms of the agreement, the federal district court in Houston has ruled (Array Holdings Inc. v. Safoco, Inc., June 11, 2013, Werlein, E.). The manufacturer also failed to state claims against former managers who negotiated the agreement because a settlement agreement in previous litigation between the manufacturer and the managers released the claims.

Array Holdings Inc. manufactures and distributes gate valves, actuators, and other flow control products for oil and gas operations. Array Holdings was created by Cadent Energy Partners to acquire Array Products, LLC. The purchase deal between Array Products and Array Holdings closed in November 2005. In June 2005, Safoco Inc. filed suit against Array Products for violation of Safoco’s patents, a case settled in December 2005.

According to Array Holdings’ complaint, however, the patent lawsuit was a sham intended to force Array Products to enter into a settlement agreement (“Safoco agreement”) that contained provisions in violation of antitrust laws. Managers for Array Products and Array Products’ attorneys McAfee and Taft, who negotiated the agreement with Safoco and became managers and attorneys for Array Holdings following the acquisition, allegedly knew the agreement’s terms were illegal.

The managers later left to form their own competing valve company, Omni Valve Company, LLC. Following a lawsuit by Array Holdings alleging breach of contract, tortious interference, misappropriation of trade secrets, unfair competition, disparagement, conspiracy, and breach of fiduciary duty, the parties entered into a settlement agreement (“Omni agreement”).

In the present lawsuit, Array Holdings asserted claims against Safoco for antitrust violations, false patent marking, fraudulent inducement, and duress, for a declaratory judgment that the Safoco agreement was void, and for declaratory judgments of noninfringement and unenforceability as to each of Safoco’s patents. Array Holdings also asserted claims for antitrust violations, false patent marking, fraudulent inducement, and duress against the former managers and McAfee, and for breach of fiduciary duty against McAfee.

Release. The court first addressed a motion for summary judgment and for recovery on a breach of contract counterclaim by the former managers on the ground that the Omni agreement contained a release of all claims against them. The agreement released all claims “that were brought or could have been brought in the Lawsuit, or in a separate action, including claims of every kind, absolute or contingent, direct or indirect, known or unknown, that could have been asserted or that are based upon any alleged facts known to Array or those that could have been known to Array.”

Although Array Holdings argued that it did not have knowledge of its claims when it signed the Omni agreement, the court observed that the agreement expressly encompassed “unknown” claims. Therefore, Array Holdings was precluded “from claiming it [was] not bound because it did not know of a claim that it had.”

Moreover, Array Holdings could not succeed on a claim that the managers fraudulently induced Array Holdings to enter the Omni agreement. Testimony from Array Holdings’ CEO that he was “convinced” the Omni Agreement “was an attempt by the Former Manager Defendants and the Taft Defendants to obtain a release of their fraudulent and anticompetitive actions during the negotiation” of the Safoco agreement was “simply a conclusory statement.” The court noted that the managers had no fiduciary duty by the time of the Omni agreement to disclose the alleged antitrust violations. Moreover, even assuming the managers did not provide a copy of the Safoco agreement to Cadent or to Array Holdings’ board of directors, no evidence indicated that Cadent or the board of directors would not have approved the settlement or that Cadent would have decided not to acquire Array Products.

Therefore, the court granted summary judgment to the former managers, and left for trial the amount of damages they could obtain from Array Holdings for breaching the Omni agreement.

Standing. The court concluded that Array Holdings had standing to bring its claims against Safoco, despite Safoco’s allegations that it entered into the Safoco agreement with Array Products, not Array Holdings. The asset purchase agreement between Array Products and Array Holdings was made effective in November 2005, while the Safoco agreement was executed in December 2005. Moreover, Array Holdings claimed to have been “fraudulently induced” and “induced under duress” to enter the Safoco agreement.

Antitrust claims. Therefore, the court took up Array Holdings’ claims against Safoco and McAfee. The court concluded that Array Holdings failed to state a claim for “unlawful tying and conspiracy” under Section 1 of the Sherman Act. Array Holdings had identified “the grant of a license under the Safoco patents” as the tied product, and “the requirement that licensees pay a royalty on products regardless of whether they constitute design around products or are even covered by the Safoco patents” as the tying product. The court observed that Array Holdings had failed to identify a cognizable product and had not defined a market for the alleged tying product, and hence that Array Holdings did not state a valid tying claim.

Array Holdings also did not state viable monopolization and attempted monopolization claims, according to the court. Array Holdings claimed that it had properly defined the market because its complaint listed “a number of features not readily available with other actuators.” The court observed that “merely asserting that a commodity is in some way unique is insufficient to plead a relevant market,” and that “where there are market alternatives that buyers may readily use for their purposes, illegal monopoly does not exist merely because the product said to be monopolized differs from others.”

Finally, the court noted that Array Holdings failed to state antitrust claims against McAfee because its complaint did not allege that McAfee “engaged in policy decisions so as to render them liable under the antitrust laws.” The court observed that “to subject an attorney to individual liability under the antitrust laws, the plaintiff must plead and prove that the defendant attorney exerted his power and influence so as to direct the corporation to engage in the complained of acts for an anticompetitive purpose.”

The court also found that Array Holdings’ claims for fraudulent inducement, duress, patent marking, and breach of fiduciary duty failed. However, the court granted Array Holdings leave to replead.

The case is Civil Action No. H-12-366.

Attorneys: Jeffrey T. Roebuck (Roebuck Thomas PLLC) for Array Holdings Inc. David Kent Anderson (Anderson & Cunningham) for Safoco Inc. Amy J. Pierce (Corbyn Hampton PLLC) for McAfee & Taft.

Companies: Array Holdings Inc.; Safoco, Inc.; McAfee & Taft; Cadent Energy Partners; Omni Valve Company, LLC

Cases: Antitrust TexasNews