Opinion
CASE NO. CV 07-00043 MMM (SSx).
October 29, 2007
ORDER GRANTING DEFENDANTS' MOTION TO DISMISS
Plaintiff International Norcent Technology ("Norcent") filed this antitrust action against its competitors, defendants Koninklijke Philips Electronics N.V. ("Philips NV") and Philips Electronics North American Corporation ("Philips NA"), on January 3, 2007. Norcent alleges that Philips joined with nine other producers of DVD players (collectively the "Group of 10") to develop a technical standard for DVDs ("the DVD standard"). The standard was written to ensure that each member of the Group of 10 owned a patent or patents that met the DVD standard. Various members of the Group of 10, including Philips NV, have allegedly pooled their patents and formed patent licensing entities that exact royalties and licenses from competitors outside the Group of 10. Norcent contends that the Group of 10 has also implemented a DVD specification/logo licensing program that charges fees for specifications and logos that are essential for competitors to compete effectively in the market for DVD players. On April 24, 2007, the court granted defendants' motion to dismiss the complaint. Norcent filed its First Amended Complaint on May 1, 2007. On August 3, 2007, the court granted defendants' motion to dismiss the first amended complaint. On August 20, 2007, Norcent filed a Second Amended Complaint, alleging claims under Section 1 of the Sherman Act, the California Cartwright Act, and California Business Professions Code § 17200. On September 4, 2007, defendants moved to dismiss the Second Amended Complaint.
I. FACTUAL BACKGROUND
A. Facts Common To The First Amended Complaint
Norcent, Philips NV, and Philips NA were previously competitors in the interstate sale of DVD players; they remain competitors in the interstate sale of other consumer electronics. Norcent alleges that the relevant geographic market is the United States, the geographic submarket is California, and the product market is DVD players. Philips NV and its competitors purportedly developed DVD technology and obtained patents relating to that technology. The technologies developed were not exclusive, as alternative technologies such as the MultiMedia Compact Disc system and Super Density Disc system existed.
Second Amended Complaint, ¶¶ 6-8.
Id., ¶ 9-11.
At some point, Philips NV joined with nine other competitors to develop a DVD standard. These competitors are Hitachi Ltd., Matsushita Electric Industrial Co., Ltd., Mitsubishi Electric Corporation, Pioneer Electronics Corporation, Sony Corporation, Time Warner, Inc., Toshiba Corporation, Victor Company of Japan, Ltd. ("JVC"), and Thomson Multimedia S.A. Norcent alleges that the Group of 10 intentionally excluded other interested parties from participating in development of the DVD standard.
Id., ¶ 12.
Id., ¶ 13.
The standard the Group of 10 developed purportedly ensures that each owns a patent(s) that covers an essential component of video disc players "substantially meeting the DVD standard." Norcent contends that the technologies for which the Group of 10 owns patents are not essential for interoperability. It also alleges that the Group of 10 has refused to include in the DVD standard alternative technologies for which its members do not own patents.
Id., ¶ 12.
Id., ¶ 14. Interoperability is "the ability of one manufacturer's product to interface with other manufacturers' products." Rambus, Inc. v. Infineon Technologies AG, 330 F.Supp.2d 679, 696 (E.D. Va. 2004) (citing Mark A. Lemley, Standardizing Government Standard-Setting Policy for Electronic Commerce, 14 BERKELEY TECH. L.J. 745, 746 (1999)). Standard setting is a common method of achieving interoperability. See Rambus, 330 F.Supp.2d at 696; see also Lemley, Standardizing Government Standard-Setting Policy, supra, at 746-47 (discussing alternative methods of ensuring interoperability in electronic commerce).
Second Amended Complaint, ¶ 15.
Norcent asserts that, "at least initially," the Group of 10 collectively held more than a 90 percent share of the market for video disc players of all types. Norcent asserts that the Group of 10 "actively combated alternative disc formats" such as Divx and, through their activities, ensured that "no significant content was available to consumers in alternative disc formats." Once content providers committed to using DVD standard compliant discs, Norcent contends, "consumers were coerced to buy only video disc players that substantially conform to the DVD standard in order to play such discs." This, in turn, precluded competitors "from selling competitive video disc players that do not substantially conform to the DVD standard"; to compete in the market and submarket, they were forced to pay royalties to members of the Group of 10.
Id., ¶ 20.
Id., ¶ 22, 25.
Id., ¶ 25.
Id., ¶ 26.
Norcent also alleges that the Group of 10 used its "power" in the relevant market and submarket, as well as "collective action," to establish the "DVD" name and logo owned by the Group of 10 "so that consumers will only purchase DVD players that use the 'DVD' name and logo." Indeed, it asserts, the name "DVD" has become "virtually generic" for any compact video disc. Norcent contends that the Group of 10 "acts collectively" to prevent competitors from selling DVD players that use the "DVD" name and logo if those players do not conform to the DVD standard.
Id., ¶ 27.
Id.
Id.
"By virtue of their ownership of patents essential to the DVD standard," for which there are purportedly no commercially viable competitive products, the Group of 10 allegedly "has the ability to reduce output by excluding competitors outside the Group of 10," as well as "the ability to raise consumer prices by increasing the costs to competitors outside the Group of 10." For this reason, Norcent contends, the Group of 10 collectively has market power in the relevant market and submarket.
Id., ¶ 30.
Id.,
Norcent also asserts that members of the Group of 10 have entered into cross-licensing agreements with one another. Philips NV, Sony, and Pioneer have purportedly pooled their patents to (1) exact royalties from competitors outside the Group of 10; (2) exact "grant back" licensing rights; and (3) gain a competitive advantage in the market and submarket. The three companies sought U.S. Department of Justice review of their patent pooling, but allegedly failed to disclose to the Department that they had combined with other competitors to develop a DVD standard "[for the] purpose of making Philips N.V., Sony and Pioneer patents essential to the DVD standard."
Id., ¶ 31.
"A grantback is an arrangement pursuant to which a licensee agrees to extend to the licensor of intellectual property the right to use the licensee's improvements to the licensed technology. Grantbacks can have procompetitive effects, especially if they are nonexclusive. . . . A non-exclusive grantback [i.e., one that permits licensing to the licensor as well as others] allows the licensee to practice its technology and license it to others. Such a grantback provision may be necessary to ensure that the licensor is not prevented from effectively competing because it is denied access to improvements developed with the aid of its own technology." (Motion to Dismiss the Original Complaint at 19 n. 16 (quoting IP Guidelines for the Licensing of Intellectual Property § 5.6, at 30 (1995)).
Second Amended Complaint, ¶ 32.
Id., ¶ 33.
The Group of 10 eventually formed three patent licensing entities, each of which holds patents essential to the manufacture and/or sale of DVD players. These are: (1) the "3C" pool, comprising patents owned by Philips NV, Sony, and Pioneer; (2) the "6C" pool, comprising patents owned by Toshiba, Time Warner, Matsushita, Hitachi, Mitsubishi Electric, and JVC; and (3) Thomson. The licensing entities allegedly continue to operate today.
Id., ¶ 34.
In addition, the Group of 10 has implemented and owns a DVD specification/logo licensing program, known as the DVD Format/Logo Licensing Corporation ("DFLLC"). Norcent alleges that, to compete effectively in the market and submarket, competitors must pay fees to this corporation for specifications and logos.
Id., ¶ 35.
Norcent asserts that defendants have gained a significant unfair competitive advantage as a result of the DVD standard, their patent holdings, and their specification/logo licensing program. It contends that this competitive advantage has harmed competition and consumers by, for example, increasing the cost of DVD players purchased from suppliers who must pay royalties.
Id., ¶ 36.
Philips NA, acting for Philips NV and the 3C patent pool, has purportedly demanded that Norcent pay license fees or buy from licensed manufacturers whose costs are high because of the royalties they pay to the Group of 10. It has also allegedly taken steps to stop Norcent's (and other competitors') customers from purchasing DVD players for which no license fees have been paid. The 6C patent pool, too, has purportedly demanded that Norcent and other competitors outside the Group of 10 pay license fees.
Id., ¶ 38.
Id.,
Id., ¶ 39.
Norcent asserts that it and other companies cannot reasonably compete in the market and submarket without paying additional costs to the Group of 10, and that it has been driven out of the market and submarket as a result. It reports that "other large competitors" such as Haier and Shinco have been or are being driven out of the market and submarket, and that the top twenty Chinese DVD manufacturers will withdraw from the market and submarket by 2008 "because of their inability to profitably compete due to the anticompetitive conduct of the Group of 10." Purportedly, the exclusion of Norcent and these other competitors has "significantly constrained and will continue to constrain output" in the market and submarket.
Id., ¶¶ 40-41.
Id., ¶ 42.
Id.,
Additionally, because the Group of 10 demands royalties and/or otherwise enforces its members' patents, "prices to consumers in the relevant market and submarket are [purportedly] higher tha[n] they would have been and would be in a competitive environment." Norcent alleges that the Group of 10's "unfair competitive advantage" have caused prices for DVD players to "plateau at supra-competitive levels such that consumers have been and are being forced to pay supra-competitive prices." It seeks treble damages, attorneys' fees and costs, injunctive relief, restitution, and disgorgement of profits.
B. Facts Newly Alleged In The Second Amended Complaint
Id., ¶ 43.
Id., ¶ 44.
Id. at 16 (prayer for relief).
Because it has dismissed Norcent's two prior complaints, the court considers, in deciding this motion, whether Norcent's second amended complaint pleads new facts that "nudge [its] claims across the line from conceivable to plausible." Bell Atlantic Corp. v. Twombly, 550 U.S. ___, 127 S.Ct. 1955, 1974 (2007).
Among the new allegations found in the second amended complaint are the dates on which actions previously alleged occurred. Norcent asserts, for example, that Philips N.V. combined with Sony and Pioneer "beginning in the mid- to late-1990s and continuing into the present to pool patents purportedly essential to the DVD standard. . . . " It also alleges that the 3C patent pool began to demand that it pay license fees or buy from licensed manufacturers "in the summer of 2003." Finally, Norcent contends that it was "driven out" of the relevant market and submarket in 2005.
Id., ¶ 32.
Id., ¶ 38.
Id., ¶ 41.
Norcent has also added substantive allegations. These include specifics regarding the Group of 10's standard setting meetings. Norcent contends that executives of each member the Group of 10 were present at meetings held in Tokyo, Japan, between September and December 1995. It asserts that "additional meetings have been held in subsequent years in locations including Japan [and that these] continu[e] to the present." Norcent alleges that "the definition of the DVD standard was one of a series of steps in furtherance of an on-going combination whose purpose and effect has been to provide Philips and the Group of 10 with an unfair competitive advantage in the relevant market and submarket." It also asserts that the Group of 10 acted collectively through an unincorporated partnership previously known as the "DVD Consortium" and later as the "DVD Forum."
Id., ¶ 17. Norcent asserts that among the executives present were Jan Oosterveld and Henk Bodt of Philips, Sony's Norio Ohga, and Toshiba's Tazio Nishimuro. ( Id., ¶ 18.)
Id., ¶ 17.
Id., ¶ 12. Norcent deleted an allegation that the Group of 10 has "continued acts in furtherance of this unlawful scheme." (Compare id., ¶ 16 with First Amended Complaint, ¶ 16.) Norcent's new allegation may simply be a restatement of the deleted allegation, as both assert the existence of an unlawful combination or scheme, and allude to unspecified steps or acts taken in furtherance of the combination.
Id., ¶ 19. Norcent notes that "the Group of 10 were, and continue to be, among the largest consumer electronics companies in the world. . . ." ( Id., ¶ 20.) This allegation supports Norcent's assertion that the Group of 10 accounts for more than ninety percent of the market for video disc players. ( Id.)
In 2000, the Group of 10 purportedly formed the DFLLC, a Japanese corporation that is jointly owned by its members. Norcent asserts that, from the time of its creation to the present, the Group of 10 has used the DFFLC to "oversee the DVD markets, grant licenses, collect royalties and monitor compliance with the DVD standard." In addition to defining the DVD standard, Norcent alleges that "the Group of 10 agreed to produce only compact video disc players compliant with the DVD standard and agreed not to produce competing compact video disc players that were not compliant with the DVD Standard." It asserts that, acting through the DFLLC, the Group of 10 has "threatened licensees who attempt to manufacture alternative compact video discs that are not compliant with the DVD standard." Specifically, it alleges that the DFLLC "threatened to terminate the licenses of licensees that manufacture alternative compact video discs that do not comply with the DVD standard" by publishing "a general announcement over the internet." Finally, Norcent contends that the production of DVD discs is "a capital intensive undertaking, requiring equipment for laser beam recording, development of a master, replication of the master, electroforming, stamping, molding of substrates and spin coating."
Id., ¶ 19.
Id.
Id., ¶ 21.
Id., ¶ 28.
Id. Relatedly, Norcent repeats an allegation, raised in the previous complaint, that "only products that comply with the DVD standard exist or can exist in the relevant market and submarket." Id., ¶ 29; First Amended Complaint, ¶ 20.
Second Amended Complaint, ¶ 23. Norcent has made a number of other minor changes from the first amended complaint, which appear simply to reorganize earlier allegations. The allegations in paragraph 18 of the first amended complaint now appear in four separate paragraphs. (See id., 22, 24-26; First Amended Complaint, ¶ 18.) Although the wording is slightly different, these paragraphs allege that the Group of 10: (1) actively combated alternative disc formats (Second Amended Complaint, ¶ 22); (2) used its combined market power to compel content providers to invest in and commit to using discs that complied with the DVD standard ( id., ¶ 24); (3) ensured that no content was available in alternative disc formats, thereby coercing consumers to buy DVD standard compliant video disc players ( id., ¶ 25); and (4) precluded competitors from selling competitive compact video disc players that did not substantially conform to the DVD standard, forcing all competitors to pay royalties to the Group of 10 to compete in the relevant market ( id., ¶ 26.)
II. DISCUSSION
A. Legal Standard Governing Motions To Dismiss Under Rule 12(b)(6)A Rule 12(b)(6) motion tests the legal sufficiency of the claims asserted in the complaint. A Rule 12(b)(6) dismissal is proper only where there is either a "lack of a cognizable legal theory" or "the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1988). In deciding a Rule 12(b)(6) motion, the court generally looks only to the face of the complaint and documents attached thereto. Van Buskirk v. Cable News Network, Inc., 284 F.3d 977, 980 (9th Cir. 2002); Hal Roach Studios, Inc. v. Richard Feiner Co., Inc., 896 F.2d 1542, 1555 n. 19 (9th Cir. 1990). If a document is incorporated by reference in a complaint, but is not physically attached, a court may consider the document so long as it is central to plaintiff's claim and no party questions its authenticity. See Marder v. Lopez, 450 F.3d 445, 448 (9th Cir. 2006) ("A court may consider evidence on which the complaint 'necessarily relies' if: (1) the complaint refers to the document; (2) the document is central to the plaintiff's claim; and (3) no party questions the authenticity of the copy attached to the 12(b)(6) motion"); In re Silicon Graphics Inc. Securities Litigation, 183 F.3d 970, 986 (9th Cir. 1999) ("[the incorporation by reference doctrine] permits a district court to consider documents 'whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the [plaintiff's] pleading,'" quoting Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994)).
The court must accept all factual allegations pleaded in the complaint as true, and construe them and draw all reasonable inferences from them in favor of the nonmoving party. Cahill v. Liberty Mutual Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996); Mier v. Owens, 57 F.3d 747, 750 (9th Cir. 1995). It need not, however, accept as true unreasonable inferences or conclusory legal allegations cast in the form of factual allegations. See Twombly, 127 S.Ct. at 1965 ("While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact)" (citations omitted)).
This is particularly true in the context of antitrust claims, because "'the costs of modern federal antitrust litigation and the increasing caseload of the federal courts counsels against sending the parties into discovery when there is no reasonable likelihood that the plaintiffs can construct a claim from the events related in the complaint.'" Id. at 1967 (quoting Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1106 (7th Cir. 1984) (alteration deleted)); see also Cascade Health Solutions v. PeaceHealth, _ F.3d _, 2007 WL 2473229, *14 (9th Cir. Sept. 4, 2007) (noting the potential burden of antitrust trials, and "declin[ing] to adopt a rule that might encourage more antitrust litigation than is reasonably necessary to ferret out anticompetitive practices").
B. The Sherman Act Claim
Section 1 of the Sherman Act declares that "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations," is illegal. 15 U.S.C. § 1. Because even beneficial business contracts and combinations restrain trade to some degree, § 1 has been interpreted to prohibit only those contracts or combinations that are "unreasonably restrictive of competitive conditions." Standard Oil Co. v. United States, 221 U.S. 1, 58 (1911); see also Jack Russell Terrier Network of N. Cal. v. Am. Kennel Club, Inc., 407 F.3d 1027, 1033 (9th Cir. 2005) ("Section 1 is intended to prohibit actions that unreasonably restrain competition" (emphasis added)). To prevail on a claim under § 1 of the Sherman Act, plaintiff must prove: (1) that there was a contract, combination, or conspiracy; (2) that unreasonably restrained competition; and (3) that affected interstate or foreign commerce. See, e.g., Tanaka v. University of Southern California, 252 F.3d 1059, 1062 (9th Cir. 2001).
Activity that allegedly violates § 1 is evaluated under either a per se or "rule of reason" standard. See Paladin Assocs., Inc. v. Montana Power Co., 328 F.3d 1145, 1154 (9th Cir. 2003). Whichever standard is used, the court must assess the effect of the challenged conduct on competition. See NCAA v. Board of Regents, 468 U.S. 85, 104 (1984) ("[W]hether the ultimate finding is the product of a presumption or of actual market analysis, the essential inquiry remains the same — whether or not the challenged restraint enhances competition" (footnote omitted)).
A plaintiff may also attempt to establish that challenged conduct "unreasonably restrained competition" by "proof of a 'naked restraint,' where an adverse effect on price or output is obvious." Carter v. Variflex, Inc., 101 F.Supp.2d 1261, 1266 (C.D. Cal. 2000); see also 1 ABA Section of Antitrust Law, ANTITRUST LAW DEVELOPMENTS 62-63 (5th ed. 2002) ("ANTITRUST LAW DEVS.") ("In quick look cases where 'an observer with even rudimentary understanding of economics could conclude that the arrangements in question have an anticompetitive effect on customers and markets,' courts do not require the plaintiff to establish every aspect of anticompetitive effect before the burden shifts to the defendant to prove the restraint's offsetting procompetitive effects," quoting Cal. Dental Ass'n v. FTC, 526 U.S. 756, 770 (1999) (footnotes omitted)). "The quick look analysis . . . is the exception, not the rule." Carter, 101 F.Supp.2d at 1266. Neither party has suggested that the court employ the "quick look" approach to analyze the allegedly anticompetitive conduct at issue here.
The per se standard applies only to "conduct that is manifestly anticompetitive, that is, conduct that would always or almost always tend to restrict competition and decrease output." Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 723 (1988) (citations and internal quotations omitted). In contrast, "the rule of reason is to be applied 'where the economic impact of the challenged practice is not obvious.'" Jack Russell Terrier Network of N. Cal., 407 F.3d at 1033 n. 13 (quoting Harkins Amusement Enters., Inc. v. Gen. Cinema Corp., 850 F.2d 477, 486 (9th Cir. 1988), and Dimidowich v. Bell Howell, 803 F.2d 1473, 1480 (9th Cir. 1986)). Rule of reason review is the presumptive form of analysis in § 1 cases. See, e.g., Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 (1977) ("Since the early years of this century a judicial gloss on this statutory language has established the 'rule of reason' as the prevailing standard of analysis"). "The rule of reason weighs legitimate justifications for a restraint against any anticompetitive effects." Paladin Assocs., Inc., 328 F.3d at 1156.
The parties have agreed that the "rule of reason" standard governs evaluation of the adequacy of Norcent's allegations of anticompetitive conduct. To prevail on an antitrust claim under the "rule of reason" standard, a plaintiff must prove three elements: "(1) an agreement or conspiracy among two or more persons or distinct business entities; (2) by which the persons or entities intend to harm or restrain competition; and (3) which actually injures competition." Les Shockley Racing, Inc. v. Nat'l Hot Rod Ass'n, 884 F.2d 504, 507 (9th Cir. 1989) (quoting Oltz v. St. Peter's Community Hosp., 861 F.2d 1440, 1445 (9th Cir. 1988)). If the plaintiff establishes these elements, then the fact finder "must weigh the anticompetitive effects and the procompetitive effects or business justifications advanced for the challenged restraint to determine whether it is unreasonable." Les Shockley, 884 F.2d at 507 (citing Oltz, 861 F.2d at 1445). In making this examination, the fact finder considers "all of the circumstances surrounding the restraint." Les Shockley, 884 F.2d at 508.
1. Unreasonable Restraint of Trade
As noted, only conduct that unreasonably restrains trade violates § 1 of the Sherman Act. See, e.g., Northwest Whole Stationers, Inc. v. Stationery Printing Co., 472 U.S. 284, 289 (1985) ("[E]very commercial agreement restrains trade. Whether this action violates § 1 of the Sherman Act depends on whether it is adjudged an unreasonable restraint" (emphasis original)). As a result, Norcent must allege and prove not just that defendants have restrained trade, but that they have done so unreasonably to prevail on their § 1 claim. See Rickards v. Canine Eye Registration Foundation, 783 F.2d 1329, 1333 (9th Cir. 1986) (to establish a § 1 violation under the rule of reason, plaintiff "must establish that [defendant's] action unreasonably restrained trade"). The reasonableness of a defendant's conduct is typically determined on "a case-by-case" basis, and requires that "'the fact finder weigh all of the circumstances of the case.'" Oltz, 861 F.2d at 1445 (quoting Continental T.V., 433 U.S. at 50). The analysis is generally undertaken by the fact finder after the § 1 plaintiff establishes (1) an agreement among two or more business entities (2) through which the entities intend to harm competition and (3) which actually harms competition. Les Shockley, 884 F.2d at 507. As a general matter, § 1's prohibitions have been held to "encompass a wide variety of anticompetitive practices, including horizontal and vertical price fixing, horizontal and vertical restraints on such non-price factors as territories and customers, tying agreements, exclusive dealing agreements, and, finally, anticompetitive boycotts or concerted refusals to deal." Amarel v. Connell, 102 F.3d 1494, 1521 (9th Cir. 1996) (citations omitted).
Defendants argue that, despite Norcent's further amendments, the second amended complaint "uses anti-trust jargon [and] alleges nothing specific other than commonplace and lawful business practices that ultimately led to innovation, successful product promotion, and marketplace success." Defendants successfully advanced a nearly identical argument in their motion to dismiss Norcent's first amended complaint. In both of its orders dismissing Norcent's prior complaints, the court found that Norcent had failed to allege facts plausibly suggesting that an anti-trust violation had occurred. Despite newly alleged facts, the court concludes that Norcent's most recent pleading does not cure the deficiency.
Defendants' Memorandum in Support of Motion to Dismiss Plaintiff's Second Amended Complaint ("Def.'s Mem.") at 2.
See August 3, 2007 Order at 10-11 ("Defendants argue that Norcent's § 1 claim must be dismissed because the complaint 'describes nothing more than ordinary[,] . . . procompetitive invention and promotion of a new product, dressed up in the jargon of antitrust,'" citing Defendants' Motion at 10:16-18).
In its April 24 order, the court noted that Norcent alleged only that defendants had collaborated with other competitors to create a DVD standard that had, as a result of their promotional efforts, become de rigueur in the industry. Citing Consolidated Metal Prods, Inc. v. American Petroleum Inst., 846 F.2d 284 (5th Cir. 1988), the court observed that "promotion" of an industry standard is not an actionable restraint of trade unless it amounts to coercion or encompasses other anticompetitive conduct.
April 24, 2007 Order at 22.
Id. at 23.
Plaintiff in Consolidated Metal sued several competitors and the American Petroleum Institute ("API"), a standard-setting organization, alleging that API's refusal to certify plaintiff's product, a sucker rod, constituted an unreasonable restraint of trade. Plaintiff alleged, among other things, that "[b]ecause of widespread acceptance of and reliance on the API standards as a measure of quality and fitness for use, certification by the API through the licensing of its monogram is essential for manufacturers of sucker rods and related equipment to compete effectively in the marketplace." Id. at 295 n. 41. The appellate court affirmed the entry of summary judgment in API's favor, concluding that no reasonable jury could find that the API's actions constituted an unreasonable restraint on trade. Although it acknowledged that API certification was "very important to buyer acceptance of sucker rods" ( id. at 295), the court determined that plaintiff had failed to show an unreasonable restraint of trade because it had not adduced evidence that "its customers were coerced by API or otherwise constrained to buy only monogrammed products" ( id. at 296). API's influence, the court reasoned, stemmed principally from its success in evaluating products, and not from coercion or anticompetitive animus. Id. at 296-97.
In its opposition and again at oral argument, Norcent attempted to reargue an issue previously decided by the court, i.e., whether the standard setting in which defendants engaged, without more, could constitute an unreasonable restraint of trade. Norcent sought to distinguish API, arguing that the standard there at issue was akin to a Good Housekeeping "seal of approval," and thus different from the standard being challenged in this case, which incorporates elements of patented technology owned by defendants and requires that companies wishing to manufacture standard-compliant video disc players pay royalties to standard-setting patent holders. The court is not persuaded. The available case law does not indicate that, by itself, setting such a standard constitutes an antitrust violation. In Radiant Burners, Inc. v. People's Gas Light Coke Co., 364 U.S. 656 (1961), the Supreme Court held that Radiant Burners had stated a Sherman Act claim by alleging that the American Gas Association ("AGA"), which tested gas burners and affixed a "seal of approval" to those that passed the tests, refused to approve Radiant's burners, and thereafter conspired with certain of its members to ensure that they would not provide gas for the burners. See id. at 658. In Allied Tube Conduit Corp. v. Indian Head, Inc., 486 U.S. 492 (1988), the Court held that competitors in the electrical conduit industry violated the antitrust laws by packing the annual membership meeting of a private standard-setting organization whose standards were routinely adopted into law by state and local governments, and causing those present to vote to disapprove another company's product. See id. at 507 ("Nor can the Association's Code be characterized as merely an exercise of the power of persuasion, for it involves the exercise of market power"); see also id. at 497 ("Petitioner conceded that it had conspired with the other steel interests to exclude respondent's product from the Code and that it had a pecuniary interest to do so"). Similarly in American Society of Mechanical Engineers v. Hydrolevel, 456 U.S. 556 (1982), the Court held that an industry-wide standard-setting organization violated the antitrust laws by allowing one competitor in the industry to interpret its code to the detriment of another. See id. at 572.
In each of these cases, the Court found an antitrust violation because an established industrywide standard-setting process was abused or manipulated. In each, there was an allegation that an industry-wide standard-setting organization had been coopted by one or more members of the industry in an anti-competitive way. Norcent does not allege that the Group of 10 abused an industry-wide standard-setting process. Rather, it argues that members of the Group of 10 came together to create a standard and successfully promoted it. None of the cases on which Norcent relies holds, or even intimates, that such behavior is prohibited. Rather, as the court found in its prior orders, private action of this type does not give rise to a Sherman Act claim absent proof of coercion.
The final case Norcent cited at argument was Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297 (3d Cir. 2007). There, the Third Circuit held that a patent holder's intentionally false promise to license its technology on fair, reasonable and non-discriminatory terms, on which a standard-determining organization's ("SDO") relied in including the technology in an industry-wide standard, constituted "actionable antitrust conduct." See id. at 314 ("Deception in a consensus-driven private standard-setting environment harms the competitive process by obscuring the costs of including proprietary technology in a standard and increasing the likelihood that patent rights will confer monopoly power on the patent holder"). Like the other decisions cited by Norcent, Qualcomm is inapposite. Although the case also involves the licensing of patents on technology included in an industry-wide standard, Norcent has not alleged that any member of the Group of 10 misrepresented its willingness to license its patents. Nor has it alleged that the patented technology was included in an industry-wide standard. In sum, Norcent has advanced no argument that causes the court to change its view that there was nothing inherently anti-competitive about the standard-setting activity in which the Group of 10 engaged.
Because Norcent's original complaint did not allege that competitors could not produce DVD players that did not meet the standard, but only that they could not "advertise or promote such DVD players "as standard-complaint," the court found Consolidated Metal analogous and granted defendants' motion to dismiss. To the extent, therefore, that Norcent once again asserts that setting and enforcing an industry standard, standing alone, is conduct that is sufficiently anti-competitive to support a § 1 claim, the court finds the argument unavailing.
Id. at 23-24.
Norcent's new allegations and dates regarding the standard setting meetings in Tokyo may add specificity, but do not support the inference that the Group of 10 entered into an illegal agreement. To transform facially legitimate standard-setting and licensing into an antitrust violation, Norcent must allege facts indicating that the purpose of the activity was to restrain trade. See In re Graphics Processing Units Antitrust Litigation, No. C 06-07417 WHA, 2007 WL 2875686, *12 (N.D. Cal. Sept. 27, 2007) (concluding that, even though plaintiff provided a detailed account of two companies' parallel pricing behavior and frequent meetings, "[p]laintiffs ha[d] not pleaded that defendants ever met and agreed to fix prices; they plead at most that defendants had the opportunity to do so because they attended many of the same meetings").
In its first amended complaint, Norcent alleged that the Group of 10 "combined to use its market power to gain acceptance of products meeting the DVD standard and to compel content providers to invest in and to commit to using discs that complied with the DVD standard." Purportedly, its members also "actively combated alternative disc formats, such as Divx." As a result of these activities, Norcent asserted, "no significant content was available to consumers in alternative disc formats," and "consumers were coerced to buy only video disc players that substantially conform to the DVD standard in order to play such discs." This market reality, Norcent contended, had created a situation in which competitors were "precluded from selling competitive video disc players that do not substantially conform to the DVD standard, [and] . . . [were required to] pay royalties to members of the Group of 10 in order to compete in the relevant market and submarket."
First Amended Complaint, ¶ 18.
Id.
Id.
Id.
Id.
Although Norcent added allegations that the Group of 10 "combined," "coerced" content providers, and "actively combated" alternative technologies to its first amended complaint, the court found that the amendments did not "nudge [its] claims across the line from conceivable to plausible." Twombly, 127 S.Ct. at 1974. Specifically, the court held that the addition of "magic words" was not alone sufficient to state a claim under § 1 of the Sherman Act. See Twombly, 127 S.Ct. at 1965 ("a formulaic recitation of the elements of a cause of action will not do"); DM Research, Inc. v. Coll. of Am. Pathologists, 170 F.3d 53, 56 (1st Cir. 1999) ("terms like 'conspiracy,' or even 'agreement,' are border-line: they might well be sufficient in conjunction with a more specific allegation — for example, identifying a written agreement or even a basis for inferring a tacit agreement — but a court is not required to accept such terms as a sufficient basis for a complaint," citing Interstate Circuit v. United States, 306 U.S. 208, 221-25 (1939)); Rutman Wine Co. v. E. J. Gallo Winery, 829 F.2d 729, 736 (9th Cir. 1987) ("The pleader may not evade [antitrust] requirements by merely alleging a bare legal conclusion" (citations omitted)); Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1110 (7th Cir. 1984) ("invocation of antitrust terms of art does not confer immunity from a motion to dismiss; to the contrary, these conclusory statements must be accompanied by supporting factual allegations").
August 3, 2007 Order at 12.
Id. at 12-13. As with all pleadings subject to Rule 8, plaintiffs presenting antitrust claims "do not have to plead any magic words." Weatherby v. RCA Corp., Nos. 85-CV-1615, 85-CV-1613, 85-CV-1614, 1986 WL 21336, *3 (N.D.N.Y. May 9, 1986); see also Bogosian v. Gulf Oil Corp., 561 F.2d 434, 445 (3d Cir. 1977) (vacating the district court's grant of summary judgment where plaintiff's complaint, though failing to include the words conspiracy, combination, or contract, "fairly read as a whole allege[d] a 'combination,' and . . . such an allegation combined with a statement of the specific course of conduct alleged to be unlawful clearly state[d] a claim"); Foam Supplies, Inc. v. Dow Chem. Co., No. 4:05CV1772 CDP, 2006 WL 2225392, *4 (E.D. Mo. Aug. 2, 2006) ("Instead of searching for magic words or phrases, a court must determine whether the complaint alleges sufficient facts"); Am. Medicorp, Inc. v. Humana, Inc., 445 F.Supp. 573, 587 (E.D. Pa. 1977) (rejecting defendant's argument that plaintiff had not alleged the "magic words" of "contract, combination, or conspiracy in restraint of trade[,]" or "monopolize or attempt to monopolize[,]" because the complaint "fairly read as a whole" alleged such activities).
Applying this standard, the court held that Norcent's first amended complaint — which alleged that the Group of 10 "combined" to use its collective share of the video disc player market to gain acceptance of the DVD standard and "to compel content providers to invest in and to commit to using discs that complied with the DVD standard" — was too vague and conclusory to state a cognizable § 1 claim. See Les Shockley, 884 F.2d at 507.
First Amended Complaint, ¶ 18.
See August 3, 2007 Order at 14 ("Norcent not only does not allege a sufficiently plausible factual basis for this conclusory allegation; it alleges no factual basis for a claim that members of the Group of 10 engaged in a common unlawful scheme — i.e., a conspiracy or combination. See Twombly, 127 S.Ct. at 1970 n. 10 (affirming the dismissal of § 1 conspiracy allegations that "mentioned no specific time, place, or person involved in the alleged conspiracies"); Floors-N-More, Inc. v. Freight Liquidators, 142 F.Supp.2d 496, 501 (S.D.N.Y. 2001) ("plaintiff must do more than allege the existence of a conspiracy — it must allege some facts in support of the claim").
In reaching this conclusion, the court relied, in large part, on the fact that Norcent did not allege any facts regarding the alleged compulsion and coercion — for example, who coerced whom, when the coercion took place, how the coercion was effected, and what comprised the conspiracy. It is true that whether a restraint is unreasonable cannot generally be determined without "thorough examination into all of the circumstances surrounding the restraint." Les Shockley, 884 F.2d at 507; see also Cascade Cabinet, 710 F.2d at 1373 ("Rule of reason analysis calls for a 'thorough investigation of the industry at issue and a balancing of the arrangement's positive and negative effects on competition," citing Northrop Corp. v. McDonnell Douglas Corp., 705 F.2d 1030, 1050 (9th Cir. 1983)). Before a factfinder can conduct such an inquiry, however, Norcent must first allege the existence of a restraint of trade cognizable under § 1. See Columbia River People's Utility Dist. v. Portland General Elec. Co., 217 F.3d 1187, 1190 (9th Cir. 2000) ("Because CRPUD has not sufficiently alleged a restraint of trade or commerce, we hold the § 1 claim must fail as a matter of law"). The question is thus whether the new allegations in Norcent's second amended complaint provide the requisite factual specificity to support its conclusions of combination and coercion.
August 3, 2007 Order at 15 (citing Twombly, 127 S.Ct. at 1970 n. 10; Associated Gen., 459 U.S. at 528 n. 17; Les Shockley, 884 F.2d at 507; Rutman Wine, 829 F.2d at 736; see, e.g., Petrochem Insulation, Inc. v. Northern Cal. N. Nev. Pipe Trades Council, No. C-90-3628 FEL, 1992 WL 131162, *6 (N.D. Cal. Mar. 19, 1992) (dismissing a complaint that "fail[ed] to state with whom the supposed agreement was made; what its terms were; . . . or [to] state what acts any defendant undertook in furtherance of it"); compare Western Duplicating, Inc. v. Riso Kagaku Corp., No. Civ. S98-208 FCD GGH, 2000 WL 1780288, *6 (E.D. Cal. Nov. 21, 2000) ("Western also alleges that Riso and its dealers conspired at the October 1994 Dealer Advisory Council Meeting to eliminate competition from 'supply pirates' such as Western. Pursuant to that conspiracy, Riso dealers allegedly agreed to use service threats to coerce customers to use Riso inks and masters and to spread fear, uncertainty and doubt in the minds of consumers to prevent them from purchasing non-Riso inks and masters. Western's allegations concerning the agreements entered into at the Dealer Advisory Council Meeting are sufficient to allege the existence of a conspiracy to restrain trade" (citation omitted)).
Norcent's most recent pleading alleges that "the Group of 10 agreed to produce only compact video disc players compliant with the standard." Norcent does not explain, either in its complaint or its opposition, how or why this newly alleged agreement constitutes an unreasonable restraint on trade in the relevant market. Norcent does not allege that the Group of 10 took action to prevent other companies from producing or selling non-DVD video players, and it is not obvious why an agreement by a group of companies (even a dominant or influential group) to restrict production to one technology would unreasonably restrain trade in that technology. The central question in determining whether a restraint on trade is unreasonable "is whether the relevant agreement likely harms competition . . . [compared to] what likely would prevail in the absence of the relevant agreement." Federal Trade Commission United States Department of Justice, Antitrust Guidelines for Collaboration Among Competitors, § 3.3; see also Paladin Assocs., Inc., 328 F.3d at 1155 (noting that the Guidelines "provid[e] guidance on evaluating 'collaboration among competitors under antitrust law'"). Norcent does not allege that any member of the Group of 10 would have pursued alternative technologies in the absence of the purported agreement nor does it plead in what manner the agreement harmed competition in the DVD market. Without some further explanation as to why it constitutes an unreasonable restraint on trade, the agreement, even if properly pled, would not suffice to support Norcent's § 1 claim.
Second Amended Complaint, ¶ 17.
This is especially true because, as noted, the relevant market identified by Norcent is the market for DVD players. It is not clear how the Group of 10's purported decision to sell nothing but DVD players could have restrained other producers from participating in the DVD market. While the decision to focus only on DVD technology might conceivably have had an impact on the market for competing technologies, or the market for all video disc players, that is not the relevant market Norcent has alleged in its complaint.
Additionally, Norcent's allegations regarding the agreement are not supported by sufficient factual context. As with the magic words "coerce," "combine," and "conspiracy," a mere allegation that parties entered into an agreement to restrain trade does not suffice to state a § 1 claim. See Twombly, 127 S.Ct. at 1966 (a naked assertion of conspiracy in a § 1 complaint "gets the complaint close to stating a claim, but without some further factual enhancement it stops short of the line between possibility and plausibility of 'entitlement to relief'"). Norcent has not alleged any facts supporting its claim that the Group of 10 agreed not to sell video disc players that did not comply with the DVD standard. It has not alleged when the purported agreement was made. Nor has it stated who made the decision, how it was made or what the parameters of the agreement were. See Twombly, 127 S.Ct. at 1971 n. 10.
Norcent alleges that the Group of 10 met in Tokyo in 1995, and that there have been subsequent meetings. (Second Amended Complaint, ¶ 17.) It does not specifically assert that the alleged agreement was made at these meetings, however.
Norcent identifies a handful of executives who met to set the DVD standard. (See id., ¶ 18.) It does not specifically allege that these executives agreed not to sell non-DVD video disc players, however.
Furthermore, as defendants note, Norcent has not alleged any parallel conduct by the Group of 10 that would give rise to an inference the agreement was made. Norcent does not allege that none of the members of the Group of 10 ever manufactured a competing video disc player. In this respect, it has provided less specificity than the plaintiffs in Twombly. There, the issue was whether specific factual allegations of parallel conduct by two telecommunications carriers, combined with an allegation of conspiracy, sufficed to state a Sherman Act claim. The Court held that they did not. See Twombly, 127 S.Ct. at 1966 ("Without more, parallel conduct does not suggest conspiracy, and a conclusory allegation of agreement at some unidentified point does not supply facts adequate to show illegality"). If a conclusory allegation of agreement is not sufficient even when supported by facts demonstrating parallel conduct, such an allegation cannot be sufficient here, where no parallel conduct or any other factual context is alleged.
Norcent alleges that "Philips has previously embraced the fact that such an agreement actually exists, saying: 'As the Complaint . . . states, in 1996, Philips and a number of other companies that developed DVD technology published a set of technical standards to promote the manufacture and sale of compatible DVD players and discs.'" (Pl.'s Opp. at 3 (quoting Memorandum of Points and Authorities in Support of Defendants' Motion to Dismiss Complaint, filed March 5, 2007 at 1).) This does not constitute an admission that defendants agreed not to manufacture non-DVD video disc players. Rather, it is entirely consistent with defendants' contention that any agreement among the Group of 10 was an agreement to set and promote standards, and not an agreement to restrict competition.
See Def.'s Mem. at 5. Proof that members of the Group of 10 never sold non-DVD video players would be the most obvious type of parallel conduct related to the alleged agreement. As noted, parallel conduct may arise from legitimate and legal business decisionmaking. See Twombly, 127 S.Ct. at 1964 ("Even 'conscious parallelism,' a common reaction of 'firms in a concentrated market [that] recogniz[e] their shared economic interests and their interdependence with respect to price and output decisions' is 'not in itself unlawful,'" quoting Brooke Group Ltd. v. Brown Williamson Tobacco Corp., 509 U.S. 209, 227 (1993)).
The Court stated that before allegations of parallel conduct would support a § 1 claim, they had to "be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action." Twombly, 127 S.Ct. at 1966. This is necessary in order to avoid commencing litigation over "merely parallel conduct that could just as well be independent action." Id.
Norcent raises the novel argument that the application of Twombly's factual context requirement would preclude actions against conspirators who "are good at planning and keeping secrets." (See Pl.'s Opp. at 2.) The Supreme Court has clearly held, however, that a plaintiff must meet the "plausibility" threshold, no matter how well the defendants concealed their actions. The Court has made the decision, as a matter of policy, that it is better to require a factual basis before allowing costly litigation to proceed than it is to permit plaintiffs to commence discovery without stating facts supporting their claims. See Twombly, 127 S.Ct. at 1966-67 ("it is one thing to be cautious before dismissing an antitrust complaint in advance of discovery . . . but quite another to forget that proceeding to antitrust discovery can be expensive"). Justice Stevens' dissent highlights this as a point of disagreement. See id. at 1976 ("Under the relaxed pleading standards of the Federal Rules, the idea was not to keep litigants out of court but rather to keep them in. The merits of a claim would be sorted out during a flexible pretrial process and, as appropriate through the crucible of trial" (Stevens, J., dissenting)). In the face of clear guidance from the Supreme Court, Norcent cannot escape Twombly's requirements by arguing that they were prevent some meritorious cases from advancing.
Given the lack of specific factual context supporting Norcent's conclusory allegation that the Group of 10 agreed to produce only compact video disc players that complied with the standard, the allegation fails to "nudge" Norcent's claim from conceivable to plausible. See Twombly, 127 S.Ct. at 1965 ("stating a [§ 1] claim requires a complaint with enough factual matter (taken as true) to suggest that an agreement was made. Asking for plausible grounds to infer an agreement does not impose a probability requirement at the pleading stage; it simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence of illegal agreement"). Consequently, the addition of an allegation that the Group of 10 agreed not to manufacture disc players that did not comply with the DVD standard does not alone persuade the court that the antitrust violation claimed is more than just "conceivable." See id. at 1974.
Norcent appears to ignore Twombly in its opposition. It claims that "standing alone, the agreement not to offer product variations could itself constitute an unreasonable restraint of trade." (See Plaintiff's Opposition to Defendants' Motion to Dismiss Second Amended Complaint ("Pl.'s Opp.") at 6.) Under Twombly, this is true only if Norcent provides factual context that makes it plausible such an agreement was actually made. See Iqbal v. Hasty, 490 F.3d 143, 157-58 (2d Cir. 2007) ("we believe the Court is not requiring a universal standard of heightened fact pleading, but is instead requiring a flexible "plausibility standard," which obliges a pleader to amplify a claim with some factual allegations in those contexts where such amplification is needed to render the claim plausible" (emphasis original)); see also TON Services, Inc. v. Qwest Corp., 493 F.3d 1225, 1236 (10th Cir. 2007) ("In Bell Atlantic, the Supreme Court articulated a new 'plausibility' standard under which a complaint must include 'enough facts to state a claim to relief that is plausible on its face,'" citing Twombly, 127 S.Ct. at 1974); Brown v. Kerkhoff, 504 F.Supp.2d 464, 522 (S.D. Iowa 2007) (reviewing the Second and Tenth Circuit's interpretations of Twombly and anticipating that the Eighth Circuit would hold that "[t]he merits of the claim need not be such that the plaintiff plausibly succeeds; the claim must merely be supported with enough factual fodder that the claim can plausibly be proven. This standard may require a plaintiff to place allegations 'in a context that raises a suggestion of' unlawful conduct, such that the plaintiff's allegations hurdle the line 'between the factually neutral and the factually suggestive,'" citing Twombly, 127 S.Ct. at 1966 n. 5).
Norcent suggested at oral argument that the court had misinterpreted the significance of this new allegation. It asserted that it had not shifted the focus of its allegations from coercion to agreement. Rather, it contended, the agreement it had pled constituted contextual evidence of coercion. The alleged agreement does not demonstrate coercion any more than the allegations contained in Norcent's prior complaints. Stated differently, the agreement not to produce non-standard compliant video disc players, without more, is not inherently coercive because it does not, on its face, bind anyone outside the Group of 10.
Norcent has also added an allegation that the Group of 10 "threatened licensees who attempt to manufacture alternative compact video discs that are not compliant with the DVD standard" Like the allegation regarding an agreement not to manufacture non-compliant disc players, the allegation regarding threats is conclusory. Norcent provides some factual context for the claim, alleging that the threat was communicated "by way of a general announcement over the internet." It does not offer any specifics regarding the announcement, however, i.e., it does not state when the announcement was made, who made it, or what its content was. See Twombly, 127 S.Ct. at 1970 n. 10 (references to "specific time, place or person" are important elements in providing notice to defendant).
Second Amended Complaint, ¶ 28.
Id.
The nature of the threat is important. A patent holder may refuse to license a non-conforming product if it chooses without running afoul of the Sherman Act. See Intergraph Corp. v. Intel Corp., 195 F.3d 1346, 1363 (Fed. Cir. 1999) ("the antitrust laws do not negate the patentee's right to exclude others from patent property"); Carter, 101 F.Supp.2d at 1265 ("Generally, courts have held that a patentee may 'grant licenses to make, use or vend, restricted in point of space or time, or with any other restriction upon the exercise of the granted privilege' without violating the antitrust laws," citing Ethyl Gas. Corp. v. United States, 309 U.S. 436 (1940)). If the DFLLC has insisted that licensees use the DVD logo only for products that comply with the DVD standard, there is nothing inherently anticompetitive about this practice. If, on the other hand, Norcent alleges that the DFLLC has threatened to revoke the license of a licensee who produces any non-conforming disc player, whether or not it bears the DVD logo, this might give rise to an inference of anti-competitive behavior. See Compton v. Metal Products, Inc., 453 F.2d 38, 44-45 (4th Cir. 1971) ("in exclusively licensing his patents, the patentee himself could neither require non-competition beyond the term of the patents nor as to items not covered by the patents"); McCullough v. Kammerer Corp., 166 F.2d 759, 763 (9th Cir. 1948) (holding that a license conditioned on the licensee using only the patented product is anti-competitive because "[t]here is no merit to the contention . . . that because the patentee may refrain from making or using competing devices, unpatented or patented, he may bind his licensee so to refrain"); cf. United States v. Paramount Pictures, Inc., 334 U.S. 131, 159 (1948) ("we hold to be illegal a refusal to license one or more copyrights unless another copyright is accepted"); United States v. Westinghouse Elec. Corp., 648 F.2d 642, 647 (9th Cir. 1981) ("Of course a patent holder may run afoul of the antitrust laws . . . [by] refus[ing] to grant licenses except on condition that royalties be paid on unpatented products," citing Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 135 (1969)).
The court cannot determine which, if either, of these scenarios is what occurred, however, because Norcent alleges the threat in a conclusory, non-specific manner. Without any information as to who was threatened, who made the threat, what the content of the threat was, and whether any licenses were revoked, the court and defendants must speculate as to whether the fact of the threat raises a plausible antitrust claim. It is precisely this type of speculative allegation that Twombly holds is insufficient. See Twombly, 127 S.Ct. at 1965 ("Factual allegations must be enough to raise a right to relief above the speculative level," citing 5 Charles Alan Wright Arthur Miller, FEDERAL PRACTICE AND PROCEDURE § 1216).
At the hearing, Norcent raised an new argument regarding the illegality of the Group of 10's licensing scheme. It asserted that members of the Group of 10 favored other members because they did not charge each other royalties. This amounts to an argument that patent pools are inherently anticompetitive. Such an argument is at odds with well-established law. See U.S. Philips Corp. v. International Trade Com'n, 424 F.3d 1179, 1193 (Fed. Cir. 2005) (holding that packaged licensing has pro-competitive purposes and is not per se violative of the Sherman Act); see also Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1, 20 (1979) ("The blanket license, as we see it, is not a 'naked restrain[t]' of trade with no purpose except stifling of competition," quoting White Motor Co. v. United States, 372 U.S. 253, 263 (1963)). The fact that members of the Group of 10 do not charge each other royalties is permissible. As defendants noted at oral argument, the patent pools at issue here resemble barter agreements in which patent holders trade the use of licenses to each other in lieu of paying royalties. The fact that there are three pools does not change this analysis. Each member of the Group of 10 is permitted to trade the use of its license in return for the right to use another member's license, and in this manner take advantage of the benefits of its research and development activities.
It is fundamental to Rule 8 notice pleading that a complaint be sufficiently specific to allow the defendant to prepare a response. See Twombly, 127 S.Ct. at 1970 n. 10 (comparing the complaint's conclusory allegations with the model Form 9 for negligence, and finding that "[a] defendant wishing to prepare an answer in the simple fact pattern laid out in Form 9 [to the Federal Rules of Civil Procedure] would know what to answer; a defendant seeking to respond to plaintiffs' conclusory allegations . . . would have little idea where to begin"); see also McZeal v. Sprint Nextel Corp., ___ F.3d ___, 2007 WL 2683705, *2 (Fed. Cir. Sept. 14, 2007) ("It logically follows that a patentee need only plead facts sufficient to place the alleged infringer on notice as to what he must defend"). Even though Norcent has alleged that the threat was communicated via a "general announcement" over the internet, without further specificity, defendants will be unable to identify the announcement to which Norcent refers, who made the announcement, what its content was, and who it threatened without more specific allegations.
The court's conclusion is bolstered by Norcent's puzzling statement in its opposition that the "[c]omplaint does not refer to any documents and no . . . documents are central to Norcent's claim." Website content is "documentary" for the purposes of the incorporation by reference doctrine. See Murawksi v. Pataki, F.Supp.2d _, 2007 WL 2781054, *8 (S.D.N.Y. Sept. 26, 2007) (considering a website on which plaintiff relied in his complaint); Knievel v. ESPN, Inc., 223 F.Supp.2d 1173, 1176 (D. Mont. 2002) (holding that the court could consider the entire contents of a website because it was mentioned in the complaint, portions were attached as exhibits, and no party questioned the authenticity of the CD-Rom reflecting its content).
Pl.'s Opp. at 8. Norcent made this claim in response to defendants' citation of two web postings that might constitute the "announcement" alleged in the complaint. One of the postings is an answer to a frequently asked question on the DFLLC's website, which states that "[t]he use of the DVD Format for products that do not conform to the Specifications is a violation of the DVD Format/Logo License. Such violation may lead to termination of the License." (Def.'s Mem. at 6-7 n. 5, citing http://www.dvdfllc.co.jp/faq.html).) The other reference defendants proffer is a portion of the publicly available DVD Format/Logo, which provides that the use of the DVD logo except in connection with authentic DVD players is a material breach of the agreement. ( Id. at 7 n. 5, citing http://www.dvdfllc.co.jp/pdf/LicenseAgreement Draft.pdf). In both of these references, the Group of 10 threatens only to revoke the license of a licensee who uses the DVD logo on non-conforming products. As noted, there is nothing improper about such a practice.
The web announcement that purportedly included the threat to licensees cannot be both the specific factual hook that allows Norcent to state a claim and yet be so general that it is not a specific document referenced in its complaint. Norcent neither admits nor denies that the two websites proffered by defendants are the "announcement" to which it refers in the complaint. On the present state of the record, the court must conclude either that defendants have proffered the website postings to which Norcent referred in the complaint, and Norcent does not challenge their authenticity, or that Norcent's reference to a "general announcement" constituting a threat is not sufficiently specific to state a claim for violation of § 1 of the Sherman Act, as defendants are unable to identify the announcement and respond.
Thus, neither Norcent's allegation that the Group of 10 entered into an agreement not to manufacture non-compliant DVDs or its allegation that the Group of 10 "threatened" licensees who attempted to market non-conforming disc players satisfies Twombly's "plausibility" requirement. The balance of Norcent's arguments in opposition to defendants' motion merely reargues points that have previously been decided against it. Norcent asserts, for example, that "the mere adoption of a standard by a decisive number of industry participants is often all that is needed to ensure that competing standards will fail in the marketplace." The court has already held, however, that setting an industry standard, without more, does not constitute an actionable restraint of trade "unless it amounts to coercion or encompasses other anticompetitive conduct." Norcent also argues that the Group of 10 conspired to ensure "that no other technology would be successful in the market." As the court has previously found, in the absence of a further allegation of anticompetitive conduct, the fact that the DVD standard has undercut the commercial success of other technologies will not support an antitrust claim.
Pl.'s Opp. at 4.
See August 3, 2007 Order at 23.
Pl.'s Opp. at 5.
At bottom, Norcent wishes to assert that "(1) setting a DVD standard to give every member of the Group of 10 patent coverage over that standard; (2) compelling the industry to commit to the DVD standard; and (3) enforcing patents covering the DVD standard to injure competition and consumers" constitutes an antitrust violation. The court has previously concluded that setting standards and ensuring that licenses comply with those standards, while creating a successful brand, does not suffice to state a § 1 claim. Absent factual context indicating that the Group of 10's standard setting and licensing activities were other than legal, Norcent's allegations that defendants improperly "compelled" the industry to commit to the standard, and "injured competition" by enforcing their patents do not alter this result. The additional details Norcent offers regarding the manner in which the standard was set, and its conclusory allegations of improper conduct, are simply not enough to "nudge [the] claims across the line from conceivable to plausible." Twombly, 127 S.Ct. at 1974. Consequently, the court grants defendants' motion to dimiss the second amended complaint.
Id. at 1.
2. Injury To Competition
In its August 3, 2007 Order, the court held that Norcent's allegations of supra-competetive consumer prices adequately alleged injury to competition. Defendants ask the court to reconsider this ruling in light of Norcent's allegations that the Group of 10 engaged in anti-competitive behavior by entering into an agreement not to produce non-compliant video disc players, and threatening licensees who manufacture non-conforming products. They assert that such conduct might injure competition in non-DVD formats, but not in the relevant market for DVD players.
See August 3, 2007 Order at 20-21.
Def.'s Mem. at 10.
Id.
In its earlier order, the court noted Norcent's allegation that defendants' actions had caused prices to plateau at supra-competitive levels. Although it found that Norcent had not adequately alleged that the Group of 10 had unreasonably restrained trade, the court reasoned that, were Norcent able ultimately to allege that the Group of 10's standard-setting and licensing constituted such a restraint, and that the standard-setting and licensing affected prices in the market for DVD players, the fact that prices had reached and remained at supra-competitive levels would constitute cognizable injury to competition. In its most recent complaint, Norcent has attempted to demonstrate that the Group of 10's standard-setting and licensing activities are anti-competitive by alleging that they were accompanied by an agreement not to manufacture or market video disc players that did not comply with the DVD standard, and threats to licensees who attempted to market non-compliant disc players. The court has concluded that, viewed in combination with Norcent's allegations regarding standard-setting and licensing, these facts either do not plead a unreasonable restraint of trade or lack adequate factual context. The court agrees with defendants, however, that to the extent these allegations are intended to detail defendants' purportedly anti-competitive behavior, they demonstrate that the injury to competition alleged is not causally linked to the illegal conduct.
The court stated:
"Norcent alleges that prices in the market have plateaued at supra-competitive levels because members of the Group of 10 exercise an unfair competitive advantage by demanding royalties and otherwise enforcing their patents. It asserts that they are able to demand royalties not simply because they own patents, but also because the Group of 10 has combined to set an industry standard for DVDs that ensures competitors must license the patents to compete effectively in the market and submarket. Whether or not such conduct is actionable under § 1 of the Sherman Act is a different question, which is addressed supra. There is no doubt, however, that the averments sufficiently state a causal link between defendants' alleged conduct — conduct that, as currently alleged, does not constitute an unreasonable restraint of trade — and the alleged supra-competitive prices being paid by consumers. Consequently, the court concludes that Norcent has adequately pleaded injury to competition." (August 3, 2007 Order at 21-22.)
The antitrust laws exist to protect competition. See Gough v. Rossmoor Corp., 585 F.2d 381, 386 (9th Cir. 1978) ("the antitrust laws . . . were enacted for 'the protection of Competition, not Competitors,'" quoting Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S, 477, 488 (1977)). For this reason, a plaintiff must allege injury not only to itself, but to competition "within a field of commerce in which the claimant is engaged (i.e., 'antitrust injury')." McGlinchy v. Shell Chemical Co., 845 F.2d 802, 811 (9th Cir. 1988); see also Gough, 585 F.2d at 386 ("The conduct must have an adverse impact on the competitive conditions in general as they exist within the field of commerce in which the plaintiff is engaged").
To allege injury to competition, a plaintiff "may not merely recite the bare legal conclusion that competition has been restrained unreasonably." Les Shockley, 884 F.2d at 508. "[A]t a minimum," it must "sketch the outline of the antitrust violation with allegations of supporting factual detail." Id. at 508; see also Rutman Wine, 829 F.2d at 736 ("The pleader may not evade [antitrust] requirements by merely alleging a bare legal conclusion; if the facts 'do not at least outline or adumbrate' a violation of the Sherman Act, the plaintiffs 'will get nowhere merely by dressing them up in the language of antitrust'" (citation omitted)).
There is no doubt that supra-competitive prices to consumers are a cognizable form of antitrust injury. See American Ad Mgmt., Inc. v. GTE Corp., 92 F.3d 781, 791 (9th Cir. 1996) ("it is difficult to imag[ine] a more typical example of anti-competitive effect than higher prices"); Rebel Oil v. Atlantic Richfield Co., 51 F.3d 1421, 1433 (9th Cir. 1995) ("Consumer welfare is maximized when . . . consumers are assured competitive price and quality. Accordingly, an act is deemed anticompetitive under the Sherman Act only when it harms both allocative efficiency and raises the prices of good above competitive levels or diminishes their quality" (emphasis original)). To prove cognizable injury to competition, however, Norcent must allege facts demonstrating that there is a causal connection between the alleged anti-competitive actions of the Group of 10 and the alleged supra-competitive prices. Since Norcent now asserts that the Group of 10's anti-competitive behavior is its agreement not to manufacture non-compliant video disc players and its members' threats to licensees who attempt to manufacture such products, it is clear there is no causal connection between the purportedly illegal acts and the alleged injury.
This is in contrast to the causal link that theoretically could exist between defendants' standard-setting and licensing activities and the purportedly supra-competitive prices in the DVD market. Because the court previously found that those activities alone did not constitute an unreasonable restraint of trade, Norcent presented new allegations of an agreement not to manufacture non-compliant video disc players and purported threats to licensees. It alleged no facts, however, that would support a finding that these activities caused, or could cause, supra-competitive pricing in the DVD market. Nor is the link between the two readily apparent.
As noted, Norcent asserted at the hearing that it had not "shifted focus" by including these new allegations. To the extent the allegations are intended to provide support for Norcent's coercion claim, they are insufficient for the reasons stated earlier. Consequently, it is appropriate to examine whether Norcent has alleged that the purported agreement and threats are causally linked to the injury to competition it asserts.
The court's observation in its August 3, 2007 Order that Norcent had adequately alleged injury to competition was based on the complaint as then pleaded. Stated differently, it was based on the fact that Norcent at that point alleged that the Group of 10's standard-setting and licensing activities constituted an unreasonable restraint of trade. Had Norcent been able to add allegations demonstrating that, the court would have concluded that the present complaint adequately alleged injury to competition. Because it has not, however, and because it now alleges different illegal acts, the causal connection between the hypothetical restraint of trade and the injury to competition has been broken. Thus, Norcent's most recent complaint not only fails to allege an unreasonable restraint of trade, but also to allege cognizable injury to competition in the relevant market caused by such a restraint.
C. Leave To Amend
Norcent has requested leave to amend in the event the court finds that the second amended complaint does not allege sufficient factual detail to state a claim. "'Dismissal without leave to amend is improper unless it is clear, upon de novo review, that the complaint could not be saved by any amendment.'" Intri-Plex Technologies, Inc. v. Crest Group, Inc., 499 F.3d 1048, 2007 WL 2410170, *6 (9th Cir. Aug. 27, 2007) (quoting In re Daou Sys., Inc., 411 F.3d 1006, 1013 (9th Cir. 2005)). Leave to amend need not be granted where further amendment would "constitute an exercise in futility," however. Ascon Properties, Inc. v. Mobil Oil Co., 866 F.2d 1149, 1160 (9th Cir. 1989). When a party has already been given leave to amend its complaint, the district court may exercise its discretion more broadly to find that further amendment would be futile. See, e.g., Simon v. Value Behavioral Health, Inc., 208 F.3d 1073, 1084 (9th Cir. 2000) ("The district court's discretion [in granting or denying leave to amend] 'is particularly broad' when the plaintiff previously has been granted leave to amend," quoting Griggs v. Pace Amer. Group, Inc., 170 F.3d 877, 879 (9th Cir. 1999)), as amended, 234 F.3d 428; Ascon Properties, 866 F.2d at 1160 ("The district court's discretion to deny leave to amend is particularly broad where plaintiff has previously amended the complaint," citing DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 186 n. 3 (9th Cir. 1987) and Mir v. Fosburg, 646 F.2d 342, 347 (9th Cir. 1980)); see also Richardson Const., Inc. v. Clark County Sch. Dist., 223 Fed. Appx. 731, 733 (9th Cir. Mar. 5, 2007) (Unpub. Disp.) (affirming the dismissal with prejudice of a third amended complaint because plaintiff had had three opportunities to cure the infirmity); Mejia v. Stolarski, 175 Fed. Appx. 137, 138 (9th Cir. Apr. 7, 2006) (Unpub. Disp.) ("Because Mejia could not save his complaint through further amendment, the district court did not abuse its discretion in dismissing his complaint without leave to amend").
Norcent has been granted two opportunities to amend its complaint to allege something more than a conclusory violation of the Sherman Act. This is the third time the court has evaluated the sufficiency of the allegations and found them wanting. The fact that Norcent has failed, in three attempts, to state a plausible antitrust claim supports the conclusion that further amendment would be futile. See Government Computer Sales Inc. v. Dell Marketing, 199 Fed. Appx. 636, 639 (9th Cir. Aug. 28, 2006) (Unpub. Disp.) (noting that "an additional opportunity to amend would be futile because GCS ha[d] not alleged any additional facts or circumstances that give rise to a claim" after two opportunities).
Norcent has had access to all information relevant to its claim since the date it filed its original complaint. Despite the incremental addition of allegations, the second amended complaint alleges essentially the same claim pled in the original complaint; as a result, it suffers from the same infirmities. See LRL Properties v. Portage Metro Housing Authority, 55 F.3d 1097, 1104 (6th Cir. 1995) ("'Denial of [leave to amend] is not an abuse of discretion where [t]he infirmities of the original complaint are not dissipated by the amended complaint'" (internal quotation marks omitted)). Norcent has had three chances, and has failed to allege anything more than a legal standard-setting and licensing program. Consequently, the court concludes that it would be futile to allow leave to amend.
Noting that Norcent's second amended complaint alleges that the DFLLC was formed in 2000, defendants contend that it is now clear on the face of the complaint that Norcent's § 1 claim is barred by the Sherman Act's four year statute of limitations. (See Def.'s Mem. at 12.) Defendants concede that Norcent alleges "an ongoing combination" and meetings "continuing into the present." They argue, however, that the real injury alleged is the Group of 10's initial standard-setting activity, and that there is no reason to believe that the "continuing collaborations were material to the exclusion of alternative [technologies] that is the gravamen of the [second amended complaint]." (Def.'s Mem. at 13.) "A cause of action in antitrust accrues each time a plaintiff is injured by an act of the defendant and the statute of limitations runs from the commission of the act." Pace Industries, Inc. v. Three Phoenix Co., 813 F.2d 234, 237 (9th Cir. 1987) (citing Zenith Radio Corp., 401 U.S. at 338). "Even when a plaintiff alleges a continuing violation, an overt act by the defendant is required to restart the statute of limitations and the statute runs from the last overt act." Id. (citing Steiner v. 20th Century-Fox Film Corporation, 232 F.2d 190, 195 (9th Cir. 1956)). Although Norcent has failed to allege sufficiently any illegal conduct by defendants, to the extent it asserts that the Group of 10 is violating the antitrust laws by implementing its licensing regime, it pleads ongoing acts that contribute to ongoing sales at purportedly supra-competitive prices. See Klehr v. A.O. Smith Corp., 521 U.S. 179, 189 (1997) ("in the case of a 'continuing violation,' say, a price-fixing conspiracy that brings about a series of unlawfully high priced sales over a period of years, 'each overt act that is part of the violation and that injures the plaintiff,' e.g., each sale to the plaintiff, 'starts the statutory period running again, regardless of the plaintiff's knowledge of the alleged illegality at much earlier times'" (citations omitted)). The court thus disagrees that Norcent's new allegations make clear that its § 1 claim is barred by the statute of limitations. Because the complaint alleges that overt acts have continued through the present, the complaint pleads ongoing injury. Because Norcent has failed adequately to allege that defendants have unreasonably restrained trade, however, the court need not finally decide this issue.
III. CONCLUSION
For the reasons stated, the court grants defendants' motion to dismiss the second amended complaint with prejudice.