|Patent Troll’s Allegations of Hub-and-Spoke Conspiracy|
Patent Troll’s Allegations of Hub-and-Spoke Conspiracy to Monopsonize Market in Violation of Antitrust Laws Survive Motion to Dismiss.
By Barbara P. Berens and Carrie L. Zochert, Berens & Miller, P.A.
As Congress and federal agencies turn their attention to minimizing the harmful impact on innovation and competition by patent assertion entities (“PAEs”), or more colloquially, “patent trolls,” some manufacturing companies are forming defensive patent aggregators, or “anti-troll” entities to protect their members from baseless infringement claims brought by such patent trolls. A recent case highlights the potential consequences for defendants who collectively refuse to settle with, or license patents from, a patent troll.
The case, Cascades Computer Innovation, LLC v. RPX Corp., was brought by Cascades, a non-practicing entity (“NPE”), or so-called patent troll, against three manufacturers of Android-compatible devices, HTC Corporation, Motorola Mobility Holdings, Inc., and Samsung Electronics Co. Ltd.  Together the manufacturing defendants allegedly dominate the vast market share of such devices. Cascades purportedly held exclusive rights to license and enforce a number of patents, including a patent which purports to optimize the use of the Android operating system used in mobile electronic devices manufactured by the defendants.
In addition to the three manufacturers, Cascades also named RPX Corporation (“RPX”) as a defendant. RPX is a defensive patent aggregator, or anti-troll, that counts the manufacturing defendants among its 120-plus members. As a defensive patent aggregator, RPX purchases patent portfolios or patent rights for the benefit of its members; RPX promises to never assert the patents in its portfolio as a means of protecting its members against patent trolls’ baseless patent infringement claims. 
RPX members pay a subscription fee which in turn gives them a license to practice RPX-controlled patents. Cascades alleges that RPX occasionally serves as an intermediary purchasing agent for its members who provide financing for the acquisition of specific patent rights. In return, RPX allegedly negotiates reduced “wholesale” royalty rates for its members.
The dispute began after patent licensing negotiations between Cascades and RPX broke down. During the licensing negotiations, Cascades brought several patent infringement lawsuits against the individual manufacturing defendants as well as other RPX members. When negotiations between Cascades and RPX stalled, Cascades made each of the manufacturing defendants an identical licensing offer that included a sizeable “rebate” to the first company to accept the offer. None of the manufacturing defendant companies responded to Cascades’ offer. Cascades subsequently sued all of the entities for conspiring to fix the price of patent licenses in violation of federal and California antitrust laws.
In its Amended Complaint, Cascades alleges a hub-and-spoke conspiracy in which RPX is the hub and the defendant manufacturing companies are the spokes. Hub-and-spoke conspiracies are a hybrid of horizontal and vertical restraints in which the “hub” is generally the dominant purchaser or supplier in the relevant market and coordinates concerted action among the “spokes.” The “rim” of the “wheel” of a hub-and spoke-conspiracy is the connecting agreements among the horizontal competitors that form the spokes.
Cascades claims that the manufacturing defendants conspired together and agreed that none of them would deal with Cascades on an individual basis (horizontal agreement, or the “rim”) and that they would only deal collectively with Cascades through RPX (vertical agreements, or the “spokes”), or not at all. Cascades alleges that such agreements unlawfully suppress the market price of its patents and restrain competition in violation of Section 1 of the Sherman Act.
Cascades further alleges that the defendants’ conspiratorial conduct was undertaken to obtain monopsony power over the terms and conditions for which prospective licensees would agree to license Cascades’ patents, thereby driving the price down below market value. Cascades also asserts a claim of actual or attempted monopsony against RPX in violation of Section 2 of the Sherman Act.
Monopsony power, “sometimes colloquially called a ‘buyer’s monopoly,’” is the mirror-image of monopoly power.  Where a monopoly consists of one seller with many potential buyers, a monopsony involves a dominant buyer with multiple sellers. Because the buyer controls a significant segment of the market, sellers are often forced to sell their goods for less than a competitive market rate. Although buying groups (such as RPX) are often procompetitive and create significant efficiencies that benefit consumers, antitrust concerns arise when the arrangement facilitates or increases the participants’ market power to suppress the price of goods, in this instance a patent license that would otherwise prevail in a competitive market.
Antitrust concerns can also arise on the NPE side of the fence, particularly where the patents involved are standard essential patents (“SEP”). SEPs are patents that have been integrated into an industry-approved standard and must be practiced to comply with the industry standard. SEP patent holders are generally expected to commit to license the patented technology on F/RAND (fair, reasonable, and non-discriminatory) terms by standards-setting organizations that create standards for use in designing and manufacturing technology products.
NPEs that amass a large patent portfolio consisting of SEPs as well as other nonessential patents, and subsequently demand portfolio-wide licensing arrangements, could arguably violate antitrust prohibitions on tying contracts. Tying contracts are agreements where a seller conditions the sale of one product (the “tying” product) on a buyer’s promise to purchase a different or “tied” product, or at least promises not to purchase the tied product from any other supplier. Such arrangements are unlawful to the extent the seller has sufficient market power in the tying product market to essentially force a buyer into purchasing a tied product that the buyer did not want or would have preferred to purchase elsewhere on different terms.
Antitrust concerns can also arise where NPEs target manufacturers after they have already made a significant investment in developing or commercializing the accused technology, and frequently after the technology has become standard-essential in the industry. NPEs are then in a position to “hold up” the manufacturers that are utilizing the standard by threatening an injunction, thus potentially inhibiting competition.
By definition a NPE does not utilize the patent rights it holds to manufacture or sell product. Consequently, a NPE can enforce its alleged patent rights without fear of a countersuit of infringement that typically occurs between two rival manufacturers in a patent infringement dispute.
Further, because patent enforcement is the primary purpose of a NPE, there is no disruption to their core business when a NPE aggressively pursues litigation. As a result, there is an uneven bargaining power between the parties, with the advantage going to the NPE. This business model gives NPEs a superior ability to extract higher royalties than might otherwise be available, in some instances considerably above the market value of the patents.
The FTC is currently conducting a study of patent assertion entities, including NPEs, to “enhance the quality of the policy debate” surrounding patent acquisition, litigation, and licensing practices of such entities.
Congress is also weighing in. A number of bills have been introduced in an effort to minimize the number of lawsuits filed by NPEs.
The full story has yet to be written in the Cascades litigation. Although the court denied the defendants’ motion to dismiss, the district court expressed concern with the validity of the patents at issue and the expense involved in litigating patent cases on multiple fronts in light of infringement proceedings regarding the patents that was pending in the Northern District of Illinois. The Cascades court subsequently stayed the California action until there is a determination on the merits of the patent claims in the Illinois action(s).
Barbara P. Berens is the majority shareholder in Berens & Miller, P.A., based in Minneapolis, Minnesota. She practices in the areas of antitrust, securities, and complex business litigation.
Carrie L. Zochert is a partner at Berens & Miller, where she focuses her practice on management side employment law and complex business litigation.
 See, e.g., Federal Trade Commission: Agency Information Collection Activities; Proposed Collection; Comment Request, 78 Fed. Reg. 61,352 (Oct. 3, 2013); Executive Office of the President, Patent Assertion and U.S. Innovation, 1-13 (June 2013), available at http://www.whitehouse.gov/sites/default/files/docs/patent_report.pdf.
 No. 12-cv-1143, 2013 WL 6247594, at *1-2 (N.D. Cal. Dec. 3, 2013) (Order denying motion to dismiss).
 See id. at *2, 16.
 Id. at *2.
 See RPX Corp.’s Answer to Cascades’ First Amended Complaint, No. 12-cv-1143, (N.D. Cal. Feb. 1, 2014), ECF No. 124.
 See http://www.rpxcorp.com; RPX’s Mot. to Dismiss at 4, No. 12-cv-1143, (May 14, 2012), ECF No. 54.
 See http://www.rpxcorp.com; see also Cascades, 2013 WL 6247594, at *3.
 Cascades, 2013 WL 6247594, at *3.
 See, e.g., Cascades Computer Innovation, LLC v. Motorola Mobility Holdings, Inc. et al, No. 11-cv-04574 (N.D. Ill.); Cascades Computer Innovation, LLC v. HTC Corporation et al., No. 11-cv-06235 (N.D. Ill.); see also Cascades, 2013 WL 6247594, at *3 n.2.
 Cascades, 2013 WL 6247594, at *3.
 Cascades’ initial complaint was dismissed for failure to state a claim with leave to amend. Cascades, 2013 WL 6247594, at *3 n.2.
 Cascades, 2013 WL 6247594, at *7.
 See id. at *1 n.1.
 Id. at *11.
 See Cascades, No. 12-cv-1143, Am. Compl. at ¶¶72-78, (N.D. Cal. Feb. 20, 2013) ECF No. 94.
 Id. at ¶¶79-83.
 See Cascades, No. 12-cv-1143, Am. Compl. at ¶¶84-97, ECF No. 94.
 Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc., 549 U.S. 312, 320 (2007).
 See, e.g., Microsoft Corp. v. Motorola, Inc., No. c10-1823, 2013 WL 2111217, at *1 (W.D. Wash. April 25, 2013).
 See Eastman Kodak v. Image Technical Servs., Inc., 504 U.S. 451, 461 (1992).
 Id. at 462, 464 n.9.
 See Federal Trade Commission, The Evolving IP Marketplace, Aligning Patent Notice and Remedies with Competition, 50-51 (2011), available at http://www.ftc.gov/reports/evolving-ip-marketplace-aligning-patent-notice-remedies-competition.
 Brian T. Yeh, Congressional Research Service, An Overview of the “Patent Trolls” Debate 4 (April 16, 2013), available at http://www.fas.org/sgp/crs/misc/R42668.pdf.
 See Executive Office of the President, Patent Assertion and U.S. Innovation, supra n.1, at 9-10.
 Id. at 13.
 78 Fed. Reg. 61,352.
 See, e.g., Innovation Act (H.R. 3309), SHIELD Act (H.R. 845), Patent Abuse Reduction Act (S. 1013).
 Cascades, 2013 WL 6247594, at *2.
 Cascades, No. 12-cv-1143, Order Staying Case, (Mar. 4, 2014) ECF No. 133.