Counterclaims against Intellectual Ventures could establish role for antitrust law in some ‘patent troll’ cases

31 January 2017 9:56am

23 November 2015. By Mike Swift.

For years, US regulators have struggled to apply antitrust law to rein in the surge of lawsuits by entities whose sole business model is to monetize a patent portfolio through litigation and licensing.

Even as the US Federal Trade Commission continues to work on a detailed patent assertion industry study that should be out in 2016, regulators believe a set of facts are out there that would connect the dots between patent monetization activity and harm to competition in a relevant market. Regulators just haven’t found that smoking gun yet, US Deputy Assistant Attorney General Renata Hesse of the Department of Justice’s antitrust division said recently at a conference in Silicon Valley.

Now, two companies — one in the online banking industry, and one in silicon chip technology — are telling federal judges in the Middle Atlantic region that one of the largest US patent assertion entities has left that trail of bread crumbs between the creation and assertion of a patent portfolio and the anticompetitive damage done to a relevant market.

The antitrust counterclaims brought against Intellectual Ventures by Capital One in the District of Maryland and by Toshiba in the District of Delaware are being closely watched by regulators and scholars who say they could represent a significant, though limited, role for antitrust law against abusive litigation practices by so-called “patent trolls.”

Capital One has been trying to use antitrust law to block IV’s patent litigation for more than three years. That effort failed in an initial case, when a judge in the Eastern District of Virginia dismissed Capital One’s antitrust claims against IV with prejudice in 2013. But the online banking company says it continued to amass evidence on Intellectual Ventures’ business model. And it won what could prove to be a significant victory earlier this year, when US District Judge Paul Grimm in Maryland ruled that Capital One could pursue antitrust counterclaims against IV. That may crack the door for antitrust to play a role in litigation brought against very large patent assertion entities, or “PAEs”.

Grimm’s detailed 29-page opinion found that Capital One had standing and had made plausible claims that Intellectual Ventures had violated Section 2 of the Sherman Act and Section 7 of the Clayton Act. In particular, Grimm accepted Capital One’s argument that there was a distinction between the traditional method of obtaining a patent — inventing a product and then applying for a patent on that invention — and IV’s process of working backward, amassing a portfolio of patents that monopolize an area of technology and targeting companies that have significant product investments in that area for patent infringement suits and unreasonable license fee demands.

“As previously discussed, Counterclaimants have alleged that Plaintiffs intentionally engaged in ‘anticompetitive practices,’ ” Grimm wrote. “Moreover, Counterclaimants have alleged that those practices harmed them directly by preventing them from ‘access[ing] … competitively priced commercial banking services technology’ and forcing them to choose between paying costly litigation expenses or excessive licensing fees. And, based on the allegations Counterclaimants identify, they have pleaded sufficiently that Plaintiffs’ alleged antitrust violations, and not the patents themselves, caused the injury.”

Capital One says that Intellectual Ventures’ assembly of its portfolio of about 3,500 financial services patents violated Section 7 of the Clayton Act. The portfolio was so extensive that the patent portfolio became its own relevant antitrust market, the banker says.

Grimm invoked the US Supreme Court’s 1962 decision in Brown Shoe v. United States, saying that while there was no bright line for when IV’s financial services portfolio allegedly became a monopoly under Section 7 of the Clayton Act, the Brown Shoe case allows for intervention into a merger at “any time when the acquisition threatens to ripen into a prohibited effect.”

“Under this reasoning, which, as noted, is not binding on this Court, it may be that Plaintiffs’ first 10, or 100, or 1,000 patent acquisitions did not violate § 7. But, at some point, the acquisitions, as alleged, created a monopoly and crossed the line to actionable under § 7,” Grimm wrote.

Intellectual Ventures moved in May to dismiss the antitrust counterclaims, adding the argument that Capital One could not “establish the existence of a single 3,500 patent portfolio” given that IV typically brings patent claims on behalf of multiple shell subsidiaries that “are separate legal entities.” Kristen Prigmore, a spokeswoman for Intellectual Ventures, declined to comment Monday on the Maryland and Delaware cases.

Grimm asked for more briefing from the parties in July, and is expected to rule on IV’s motion to dismiss sometime early in 2016. That ruling will be closely watched by legal scholars and antitrust regulators.

“It could be very important if this decision is upheld, because it would create a roadmap for finding large PAEs guilty of violating the antitrust laws in any case in which they put together large patent portfolios and use them against other companies,” said Michael Carrier, a law professor at Rutgers University who has been following the Capital One-IV case.

The Toshiba antitrust counterclaim against Intellectual Ventures in Delaware, before US District Judge Sue L. Robinson, is not as advanced but closely mirrors the Capital One case in Maryland.

Similar to Capital One, Toshiba said in a filing this fall that IV has violated Section 2 of the Sherman Act and Section 7 of the Clayton Act by assembling a portfolio of more than 3,700 patents that are essential for making, selling, and using flash memory, system on chip (SoC), USB host controller, and hard drive products. Intellectual Ventures then asserted its monopoly power on the SoC portfolio to demand unreasonable patent license fees, Toshiba said.

IV recently moved to have those antitrust counterclaims dismissed, telling Robinson that Toshiba cannot transform its lawful acquisition and assertion of valid patents into an antitrust violation.

“The Toshiba defendants attempt to revive the sordid tradition of transforming a business dispute into an antitrust violation, with the specter of massive treble damages, through the assertion of unsupportable claims of a type rejected by the Eastern District of Virginia,” Intellectual Ventures told Robinson, referring to IV’s win over Capital One in the 2013 case. “Under well-settled law, there is no basis that permits Toshiba to transform the lawful acquisition, ownership, and assertion of presumptively valid patents into antitrust violations or patent misuse. Toshiba’s antitrust counterclaims should be dismissed and its patent misuse defense stricken.”

The large size of the patent portfolios in both cases underscores the fact that these cases are only likely to be applicable to very large PAEs, such as Intellectual Ventures. It is not broadly known — at least not until the FTC completes its report on the industry — how many PAEs are similar in scale to Intellectual Ventures with the ability to assemble a patent portfolio that would be indispensable for an entire sector of technology.

Nevertheless, Carrier said Grimm’s forthcoming decision in IV’s motion to dismiss Capital One’s counterclaims could be broadly significant for three reasons.

One is that the judge may define with more precision when monopoly power is based in a patent portfolio and what finding is necessary to demonstrate that monopoly power.

The second is that Grimm may add more detail to the standard for when a PAE business model that has little or nothing to do with the creation of new products becomes abusive or predatory.

Third, the judge may sharpen the fuzzy boundary for when a PAE’s progressive acquisition of patents in a specific technology area crosses the line into being a monopoly and becomes actionable under the Clayton Act.

“This could really make a difference in terms of how antitrust would treat patent trolls,” Carrier said.

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