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From Antitrust Law Daily, October 3, 2016

Judgments against telecom equipment maker for tying, attempted monopolization reversed

By E. Darius Sturmer, J.D.

A judgment at trial holding telecommunications equipment manufacturer Avaya liable for unlawful tying and attempted monopolization and awarding substantial damages to an independent equipment servicer was vacated by the U.S. Court of Appeals in Philadelphia. The appellate court concluded that the lower court had erred in entering summary judgment against Avaya’s tort and contractual claims mid-trial (Avaya Inc. v. Telecom Labs, Inc., September 30, 2016, Jordan, K.).

In light of how intertwined the two sides’ claims against each other were—and given that Avaya’s antitrust defense relied heavily on justifying Avaya’s conduct as a response to the servicer’s conduct—the erroneous summary judgment infected the jury’s verdict, in the appellate court’s view. Therefore, the judgment of antitrust liability was vacated and remanded with instructions to enter judgment as a matter of law for Avaya.

The independent servicer, Telecom Labs, Inc. (TCI), was formerly a dealer and service provider for Avaya, until a falling out between the companies. Afterward, Avaya aggressively acted to block TCI from providing independent maintenance services for Avaya equipment—namely, by regulating access to and disabling certain maintenance software permissions and commands—and TCI "took a series of legally dubious actions to gain access to Avaya communications systems used by clients the parties once shared." When Avaya filed suit asserting numerous business torts and breach of contract, TLI asserted antitrust violations by Avaya as its defense.

At trial, after Avaya presented its case in chief, TLI moved for and received summary judgment on Avaya’s claims, the court reasoning that since TLI’s customers were authorized to use the maintenance commands and to give them to TLI for servicing, TLI could not have breached contractual or tort duties by gaining access to those commands. With the affirmative case thrown out in every respect, TLI presented its extensive antitrust countersuit that ultimately resulted in a jury verdict finding Avaya liable for attempted monopolization of the private branch exchange (PBX) maintenance market and unlawfully tying predictive dialing system software patches to maintenance.

Prejudice on antitrust verdict. However, the appellate court explained, that antitrust verdict against Avaya was prejudiced by the trial court’s erroneous grant of summary judgment against several of Avaya’s affirmative common law claims. The summary judgment (1) undermined Avaya’s defense that its responses to TLI’s allegedly tortious conduct were reasonable and pro-competitive, (2) lent false credence to TLI’s assertion that Avaya knew there was no truth to its letters telling customers that using independent servicers would be unlawful, and (3) led the trial court to wrongly restrict Avaya’s cross-examinations of TLI witnesses, in the court’s view.

The erroneous decision on the common law claims may well have affected the jury’s assessment of the reasonableness and purpose of Avaya’s actions, thus preventing it from weighing Avaya’s defenses to the antitrust claims in light of the rule of reason standard for both the Sec. 1 and Sec. 2 Sherman Act claims, in the appellate court’s view. It also undercut a specific portion of Avaya’s antitrust defense by leading to a jury instruction that all but told the jury that Avaya’s customer letters were false. "Whether the letters could constitute monopolistic conduct turned on whether they were true," the appellate court said, and pushing the jury to the conclusion that they were false enabled TLI’s trial counsel to more effectively argue that they were instead monopolistic. Finally, the summary judgment decision led the trial court to restrict testimony implying that TLI’s actions were unlawful and demonstrating that Avaya’s action "cleared the field" in a way that advantaged TLI competitively, which left Avaya "hamstrung in its ability to justify its supposedly anticompetitive conduct," the court remarked. The effect of these errors was not harmless, the court concluded. Because the errors "quite possibly" affected the judgment, it had to be vacated.

Validity of antitrust counterclaims. Further, the appellate court determined that Avaya was entitled to judgment on TLI’s tying counterclaim, as well as part of its attempted monopolization counterclaim. TLI adduced insufficient evidence to support its tying claim, the court found, given that the allegedly tied maintenance patches were freely available until 2007 and were thereafter precluded by Avaya’s imposition of certain contractual prohibitions upon its PDS customers.

As for the Sec. 2 claims, the court concluded that Avaya could not be liable for attempting to monopolize the PBX market after it introduced language in its 2008 customer contracts making clear that they would not be able to use independent service providers. However, before that clarification tipped the evidentiary scale, there could yet be sufficient evidence to support a verdict of liability for the pre-2008 period, the court decided. The evidence that convinced the jury that Avaya had dissociated the primary PBX upgrade market from the maintenance aftermarket was sufficient to show exclusionary conduct for purposes of Sec. 2.

Noerr-Pennington. The court affirmed the district court’s ruling that Avaya’s litigation conduct was protected from antitrust liability by the Noerr-Penningtondoctrine. Although some of the claims that were dismissed before trial may have been weak, they were part and parent of a course of litigation that proceeded to two months of substantial evidence and argument to a jury, the appellate court observed. Avaya’s affirmative claims in the suit were neither frivolous or unsubstantiated, in the court’s view.

Partial dissent. A partial dissent contended that the trial court’s mid-trial rejection of Avaya’s claims did not taint the entire trial and ultimate verdict. The dissent expressed doubt in the adequacy of Avaya’s briefing with respect to the tainting of the antitrust verdict. Even without the benefit of developed adversarial briefing on the matter, the dissent stated, "I do not believe the District Court’s judgment as a matter of law so impaired Avaya’s ability to defend itself against TLI’s allegations of anticompetitive conduct that we cannot have confidence in the jury verdict as a whole."

The cases are Nos 14-4174 and 14-4277.

Attorneys: Catherine M.A. Carroll (Wilmer Cutler Pickering Hale and Dorr LLP) and Trevor J. Cooney (Archer & Greiner, P.C.) for Avaya Inc., RP. Douglas F. Broder (K&L Gates) and Raymond A. Cardozo (Reed Smith LLP) for Telecom Labs Inc., Teamtli.Com, Corp. and Continuant Inc.

Companies: Avaya Inc., Telecom Labs Inc.; Teamtli.Com, Corp.; Continuant Inc.

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