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From Antitrust Law Daily, December 20, 2013

Misuse defense, antitrust counterclaims fail against patent assertion entity

By John W. Arden, J.D., LL.M.

Capital One Financial Corp. failed to state a patent misuse defense and antitrust counterclaims to infringement claims brought by Intellectual Ventures I, a patent assertion entity (PAE), according to the federal district court in Alexandria, Virginia (Intellectual Ventures I LLC v. Capital One Financial Corp., December 18, 2013, Trenga, A.). Thus, the patent misuse defense was stricken and the monopolization, attempted monopolization, and unlawful asset acquisition claims were dismissed.

On June 19, 2013, Intellectual Ventures I brought suit against Capital One and other entities, alleging infringement of patents applying to the technology market for financial institutions. In response, Capital One and other defendants (collectively, “Capitol One”) filed an answer alleging the defense “patent misuse” and asserting counterclaims for monopolization, attempted monopolization, and unlawful asset acquisition under the Sherman and Clayton Acts.

As a PAE (or “patent troll”), Intellectual Ventures holds a portfolio of approximately 80,000 patents and patent applications, including 3,500 patents in the technology market for financial institutions, according to the answer and counterclaims. It does not commercialize technology nor builds products, but instead engages in the “submarine holdup” of innovators that provide goods and services to consumers, Capitol One asserted. Intellectual Ventures accomplishes its anticompetitive business objectives through secrecy, misdirection, and obfuscation, including using a labyrinthine network of 2,000 shell companies, according to Capitol One. These shell companies allegedly conceal the patents so that “targets have no idea that it is building walls of patents around their businesses.”

Intellectual Ventures targets almost exclusively the “ex post” licensing market for “technology enabling business processes common throughout the commercial banking industry in the United States,” after companies have already made their investments in technological solutions, as opposed to the “ex ante” technology licensing market, where companies assess competing technological solutions before making investments based on known patents and the available licensing terms, Capital One maintained. Ex post makers and buyers of technological products are locked-in, making them attractive targets for Intellectual Ventures’ alleged litigation scheme for extracting “supracompetitive licensing fees through coercion and deception.”

Capital argued that Intellectual Ventures knows that many, if not all, of its patents in the financial services market are irrelevant, invalid, unenforceable, or not infringed, but nevertheless makes sweeping infringement allegations and litigation threats. It pursues a scheme of sham litigation in bad faith, regardless of the relevance, validity, or enforceability of its patents or the likelihood of success on the merits at trial, it was alleged.

The anticompetitive effects of this conduct are “far-reaching and severe,” forcing its victims to face endless, costly, and disruptive patent litigation or accept licenses to thousands of potentially irrelevant, invalid, or unenforceable patents, Capital One contended. Intellectual Ventures reduces the incentive to innovate, since companies such as Capital One foresee that success in selling a new product will prompt Intellectual Ventures to “tax it” through litigation threats. Intellectual Ventures demonstrated its power to raise prices for its patent portfolio by successfully charging supra-competitive royalties without suffering loss of demand or sale to other licensors, Capital One argued. Rather than reflecting the economic worth of the patents, the extracted royalties reflect their “hold-up value.”

As a result of these tactics and strategies, Capital One and other commercial banks had no real economic choice other than to capitulate to unreasonable and anticompetitive demands, Capital One charged.

Intellectual Ventures filed a motion to strike or dismiss the antitrust counterclaims and the patent misuse defense. In the alternative, Intellectual Ventures filed a motion for separate trials on antitrust and patent misuse issues and for a stay on discovery for those issues.

Monopolization

In order to establish monopolization under Section 2 of the Sherman Act, a party must show (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.

Relevant market. Capital One alleged that Intellectual Ventures had monopolized the “ex post market for technology used to provide commercial banking services in the United States,” but did not allege any of the recognized indicia of a relevant market. It did not allege (1) that the proposed market consisted of an “area of effective competition” between Intellectual Ventures and the commercial banks or (2) that the proposed market contained all, or even any, of the available substitutes for the technologies included within that proposed market.

As best as the court could discern, Capital One’s proposed technology market equated to Intellectual Ventures’ portfolio of 3,500 or more patents that allegedly cover widely used financial and retail banking services in the United States because Intellectual Ventures’ patent portfolio presented an “inescapable threat” to providers of financial services. Because Capital One could not avoid Intellectual Ventures’ patent claims, it allegedly was “locked-in” to dealing with those claims. This proposed market was not a “relevant market” under any recognized antitrust jurisprudence, the court ruled.

Monopoly power. Even assuming that Capital One proposed an appropriate relevant market consisting of the ex post market for technologies used to provide commercial banking services, it failed to allege facts that make plausible its claim that Intellectual Ventures wielded unlawful monopoly power within that market, the court observed. Capital One did not allege Intellectual Venture’s share of that market and provided nothing other than conclusory allegations that Intellectual Ventures demanded and received supracompetitive prices. It did not allege any specific license fees or royalties demanded from or paid by any bank or claim that such fees and royalties were higher than charged by other patent holders. Further, it did not explain how threats of litigation to enforce presumably valid patents could render unlawful those fees that would otherwise be lawful.

Willful acquisition or maintenance. Moreover, Capital One failed to establish the second element of the claim—willful acquisition or maintenance of monopoly power, the court held. This element requires the use of monopoly power to foreclose competition, to gain a competitive advantage or to destroy a competitor, and anticompetitive conduct in order to achieve or sustain a monopoly.

Capital One did not allege that it competed with Intellectual Ventures in the relevant market. Its allegations that Intellectual Ventures’ threats to enforce patents did not include any fact-based explanation of why Intellectual Venture’s acquisition of presumed valid patents become unlawful or at what point enforcement of the multiple patents becomes unlawful monopoly power.

In arguing that Intellectual Ventures engaged in “sham litigation,” Capital One failed to allege any specific litigation history to support that claim or identify any particular patents Intellectual Ventures threatened to enforce that had expired, been cancelled, or were adjudicated to be invalid. For these reasons, Capital One failed to allege facts or circumstances that would place this litigation within any recognized exception to the Noerr-Pennington doctrine.

Attempted Monopolization

To establish attempted monopolization, a party must prove (1) that the defendant had engaged in predatory or anticompetitive conduct with (2) a specific intent to monopolize, and (3) a dangerous probability of achieving monopoly power. Capital One’ attempted monopolization claim alleged the same injury, in the same fashion, as its monopolization claim and failed to state a claim for the same reasons, the court ruled.

Unlawful Asset Acquisition

Capital One alleged that Intellectual Ventures had committed unlawful asset acquisition in violation of Section 7 of the Clayton Act, claiming that Intellectual Ventures had “amassed a financial services portfolio of extraordinary breadth,” aggregated primarily through acquisition of patents and exclusive patent licenses which were likely to substantially lessen competition in the relevant market. While Section 7 of the Clayton Act could be applied to the acquisition of patents, it only addresses situations in which the acquisition of a patent substantially lessens competition and not situations in which anticompetitive effects arise at some point after the acquisition, the court observed.

In this instance, Capitol One did not allege that Intellectual Ventures’ acquisitions, standing alone, had lessened competition. The alleged anticompetitive effects would have arisen from Intellectual Ventures’ litigation threats based on the patents it had accumulated. As with the monopolization claims, Capital One failed to allege any facts, including the identity of any particular patents or when they were acquired, that make plausible the claim that the effect of patent acquisition may be to lessen competition or tend to create a monopoly.

Patent Misuse Defense

Capital One failed to allege facts that make plausible its patent misuse defense. The concept of patent misuse is premised on the existence of an enforceable patent, and the use of the monopoly power that accompanies such a patent, to extract concessions that exceed the temporal or subject matter scope of that monopoly power, the court explained.

In this instance, Capital One did not claim that Intellectual Ventures demanded concessions beyond the monopoly power created by an enforceable patent, such as tying unpatented goods to the patent or requiring the payment of licensing fees after the expiration of the patent. Rather, Capital One claimed that Intellectual Ventures engaged in patent misuse by attempting to enforce patents that individually, or in limited number, would not likely be asserted or licensed. However, even if Intellectual Ventures required the licensing of its entire portfolio, that policy would not constitute patent misuse, the court held.

The case is No. 1:13-cv-00740-AJT-TCB.

Attorneys: Clayton Walter Thompson, II (Feinberg Day Alberti & Thompson LLP) and Craig Crandall Reilly (Law Office of Craig C. Reilly) for Intellectual Ventures I LLC. Dabney Jefferson Carr, IV (Troutman Sanders LLP) for Capital One Financial Corp.

Companies: Intellectual Ventures I LLC; Capital One Financial Corp.

MainStory: TopStory Antitrust VirginiaNews

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