PAE’s Attempt to Manipulate Antitrust Laws Thwarted (for now?)

In March of last year a noted Patent Assertion Entity (“PAE”), Cascades Computer Innovation, turned the concept of anticompetitive use of patents on its head by filing an antitrust suit against five Android manufacturers who rejected an offer to license 38 patents for $5 million.  Cascades’ suit, filed in the Northern District of California against Dell, HTC, LG, Motorola, and Samsung, alleged that the firms collusively boycotted obtaining a license through RPX, a joint-defense and negotiating service for operating entities struggling with PAEs.  This week Judge Yvonne Gonzalez Rogers restored sanity to the system by dismissing Cascades’ claims.

As we have outlined, PAEs engage in conduct that frustrates competition by raising operating costs, introducing unnecessary risk, and ultimately deterring innovation.  While the antitrust agencies are fully aware of the predicament, the rigidity of antitrust law has proven a high hurdle to overcome.  One way companies have responded to the threat of predatory patent litigation by PAEs is through joint negotiating entities such as RPX.  RPX is itself a patent holding entity, but RPX has committed to leveraging patents only as a defense to patent litigation initiated by others against RPX members.  Joint negotiating and joint litigation management firms are an efficient and effective tool for protecting companies from the throngs of patent holders looking to exploit the asymmetries of the patent system.

The five defendants are all members of RPX, which Judge Rogers distinguishes from Cascades as “a defensive patent aggregator or ‘anti-troll,’ formed to protect its members from NPEs, like [Cascades], who file infringement claims.”  Judge Rogers further explains that RPX has over 100 members, and often acts as an intermediary during patent licensing negotiations, including discouraging members from dealing independently with patent owners, though membership in RPX does not prohibit companies from negotiating individually.  RPX began to negotiate on behalf of all defendants with Cascades, but ultimately ended negotiations when they were not able to strike a deal.  Cascades responded by filing an antitrust lawsuit alleging that Dell, HTC, LG, Motorola, and Samsung conspired through RPX to form a boycott refusing to accept a license to Cascades’ patents.  Cascades alleged both a per se and rule of reason violation of Section 1 of the Sherman Act.

The per se and rule of reason distinction is very important, not just in this case, but in the future of antitrust enforcement of patent aggregators and joint licensing activities.  If a court were to use the per se framework, plaintiffs would not need to define a relevant market or demonstrate that negative effects outweigh positive effects.  The antitrust laws place a presumption of illegality on per se illegal activity, and force the defendant to overcome these burdens.  A rule of reason, on the other hand, places a high pleading and evidentiary burden on the plaintiff.  Per se is usually confined to condemning behavior that is known to be anticompetitive, or, as the Supreme Court has described, conduct that has a “pernicious effect on competition and lack of any redeeming virtue.”

The defendants filed a motion to dismiss on several grounds: 1) failure to demonstrate evidence of concerted action; 2) failure to allege harm to competition in a relevant market; 3) failure to allege antitrust injury; and 4) failure to demonstrate that it was not in each firm’s economic self-interest to refuse to enter into a licensing agreement with Cascades.

The court granted the motion to dismiss for RPX and all operating entity defendants, finding that Cascades failed to allege specific evidence of a conspiracy suitable for an antitrust case, and found that Cascades failed to define a relevant market for antitrust purposes in order to prevail on a rule of reason analysis of the competitive effects.  A lack of evidence showing a conspiracy makes an antitrust case a non-starter, and this speaks to the weakness of the Cascades complaint.  Judge Rogers detailed the shortcomings, stating “Cascades avoids its pleading obligation with subterfuge, it defines the relevant product market as broadly as ‘licenses,’ the ‘Android market,’ and mobile phones and tablets that use the Android operating system; and as narrowly as Cascades’ patents, licenses for Cascades’ patents, and products that use Cascades’ patented technology.”  Judge Rogers did dismiss the various claims without prejudice, meaning Cascades does have the opportunity to amend its complaint to satisfy the pleading requirements.

Most important for companies facing the extortion efforts of PAEs was Judge Rogers’s handling of the per se allegations.  As a matter of antitrust jurisprudence, courts will refrain from using the per se paradigm if the question arises in an industry or with respect to a practice where the courts have little familiarity.  Per se is reserved for the cut-and-dry price-fixing cases or bid rigging cases that have no plausible justification.  This is starkly different from a joint entity like RPX, which offers a very real efficiency and pro-competition explanations for its business – it allows firms to continue operating without the sunk costs of individual litigation, and prevents patent aggregators from stacking royalties.

Judge Rogers did not grant the motion to dismiss the allegation of a per se violation of the antitrust laws.  Instead, she opines that she is uncertain which standard should be applied.  Judge Rogers explains in footnote 14, “This is not a determination of whether the group boycott alleged is per se unlawful or should be analyzed under the rule of reason, only that there are insufficient facts alleged in the Complaint from which the Court can make this determination as a matter of law.”  Some might see this as cause for concern – the judge had the opportunity to close the door on per se condemnation of joint defense firms, and chose not to.

Perhaps the best way to interpret the ruling on this question is that the court recognized that patent license negotiations and the contours surrounding the abusive assertion of patents are a highly complex and fact-specific undertaking.  Rather than condemn a business model out of hand, the court made it clear that a more vivid description and full explanation of the competitive dynamic is needed.  This is excellent news for those companies who are genuinely competing, and struggling with the anticompetitive effects of PAE business practices.  On the flip side, this ruling likely calls attention to the business model of the plaintiff as much as the defendant.  As we have pointed out, sunlight on the patent litigation industry is the first step to unveiling the problem of PAEs.