We previously wrote about the nascent efforts of legislators, regulators, and representatives of technology-dependent industries to use the antitrust laws, such as Section 2 of the Sherman Act or Section 7 of the Clayton Act, to rein in perceived abuses by patent aggregation entities (“PAEs”), more commonly known as patent trolls. One potential difficulty in bringing PAEs’ actions under the antitrust laws is that their activities do not fit neatly into any traditional definition of a relevant product market. The United States District Court of Maryland, however, recently permitted antitrust counterclaims against a PAE to proceed to discovery, even though the United States District Court for the Eastern District of Virginia previously dismissed similar counterclaims involving the same parties based on a failure to allege a proper relevant product market.
In Intellectual Ventures I LLC v. Capital One Financial Corp., Intellectual Ventures I brought a patent infringement suit in the United States District Court of Maryland alleging that Capital One infringed four patents in its portfolio. Capital One asserted a counterclaim and third-party complaint (against shell companies owned and controlled by Intellectual Ventures I), alleging Intellectual Ventures I violated Sherman Act Section 2 and Clayton Act Section 7. Capital One alleged that Intellectual Ventures I owns 3,500 patents purportedly relating to online financial services, but holds those patents through an opaque network of 2,000 shell corporations. Intellectual Ventures I hides those patents to prevent businesses from designing around those patents or, once Intellectual Ventures I brings an infringement action, determining the value of any license to a single patent or group of patents. Further, Capital One alleged that Intellectual Ventures I operates in the ex post market, meaning it intentionally waits until financial institutions have designed and implemented their online banking services. After financial institutions have already invested in the online services, Intellectual Ventures I threatens constant litigation against the financial institution if it does not take a license on a broad portfolio of patents, the vast majority of which are likely invalid or do not cover the financial institution’s online banking system.
This was not the first suit between Intellectual Ventures I and Capital One. Intellectual Ventures I previously asserted patent infringement claims against Capital One in the United States District Court for the Eastern District of Virginia, where Capital One also asserted antitrust counterclaims. In the Eastern District of Virginia, the court dismissed Capital One’s counterclaim. The court found that Capital One’s alleged relevant market—“the market for technology used to provide commercial banking services in the United States”—failed to allege “any of the recognized indicia of a relevant market.” In particular, Capital One failed to identify any area of effective competition between Capital One and Intellectual Ventures I.
Based on the Eastern District of Virginia’s decision, Intellectual Ventures I moved to dismiss Capital One’s counterclaim and third-party complaint because Capital One’s relevant market allegations were barred by issue preclusion. But the District Court of Maryland found that Capital One had alleged new facts learned after the Eastern District of Virginia’s decision. The court also found that Capital One alleged a different relevant market: “that the 3,500 patents in the Intellectual Ventures companies’ financial services portfolio constitute the relevant market.” Thus, the court found issue preclusion did not apply.
The court incorporated its previous decision allowing Capital One to amend its answer to include the antitrust counterclaims. In that order, the court found Capital One alleged a proper relevant market. The court supported its finding with cases in which the defendant controlled the patents, copyright, or product lines at issue to “lock in” customers to those patents, copyrights, or product lines. For example, the court found Capital One’s alleged interactions with Intellectual Ventures I to be similar to those in Eastman Kodak v. Image Technology Services, where Kodak restricted competitors’ access to Kodak replacement parts. “Like the Kodak customers with no choice but to seek parts and services directly from Kodak (because the parts and services were necessary to run the equipment they already owned, had no equivalent, and were not otherwise available), the banks have no choice but to pay licensing fees to the Intellectual Ventures companies (and/or legal fees to challenge the licenses) because their online services, which already are in use, cannot run without their components, for which the Intellectual Ventures companies purport to hold valid patents.”
The court also found Capital One’s alleged relevant market similar to that in Meredith Corp v. SESAC LLC. In Meredith, the plaintiff alleged that the defendant, one of three performing rights organizations (“PROs”) that controlled the copyrights to music licensed for local television stations, violated Section 2 by monopolizing “the market for
television-performance rights to works within SESAC’s directory.” Television stations could not pick and choose which songs they wanted to license, but were forced to take block licenses. The court found the alleged market demonstrated significant similarity to Capital One’s proposed market: “This is akin to the circumstances in Meredith Corp., in which local stations could only go to the PROs, not the composers and musicians, and had to go to each PRO, as each amassed a distinct collection of music.”
The Eastern District of Virginia had rejected Capital One’s argument that Eastman Kodak andMeredith Corp. applied, finding that in those cases, the defendant controlled a business necessity of the plaintiff, where Capital One’s only business necessity was to avoid litigation. But the District of Maryland found that Capital One’s revised allegations properly alleged a business necessity “to continue to provide the online services they already offer without paying the cost-prohibitive licensing fees to the Intellectual Ventures companies.”
Thus, the court denied Intellectual Ventures I’s motion to dismiss, and clearly stated that the antitrust claims would proceed to discovery: “[i]t would be unwise for [the plaintiffs] to look at [their right to amend their answer] as an opportunity to seek leave to file another motion to dismiss. The time has come to move forward with discovery.”
The takeaway is that courts are divided on whether PAEs’ activities are subject to the antitrust laws, in particular whether it is possible to allege a proper relevant product market. The fact that they are divided, however, necessarily means that some courts are willing to allow a claim to go forward. The dispute between Intellectual Ventures I and Capital One is worth monitoring.