An Interesting Patent Holdup Decision out of the Central District of CA: Vizio v. Funai

Josh Wright —  11 February 2010

Readers may recall we highlighted the Vizio v. Funai complaint about a year ago, in large part because it involved antitrust and standard setting issues.  The case involves allegations that Funai breached a FRAND commitment, and thus, is an important decision in the debate over the appropriate scope of Section 2 in cases involving alleged breach of obligations made in the standard setting context (a subject I’ve written on with Bruce Kobayashi here and here, with former student Aubrey Stuempfle here, and on my own in partial defense of the D.C. Circuit’s Rambus decision here ).

Thanks to a TOTM reader, we’ve got some new information on the latest developments in Judge Matz’s opinion granting Funai’s motion to dismiss the Sherman Act Section 2 claims.  I think the opinion is an interesting addition to the growing body of case law on Section 2 and standard setting.  The entire opinion is available here.

For a brief primer for those interested, I’ll lay out some of the basic facts as they appear in the Complaint.  Thomson held a number of patents related to the transmission, receipt and use of specific program information in a digital broadcast signal.  In 1997, the Advanced TV Systems Committee (ATSC), an SSO, adopted a standard for digital TV broadcast signals and Thomson designated several patents as essential to the standard.  Thomson made FRAND commitments to ATSC, and subsequently, the FCC adopted major elements of the ATSC standard.   In September 2007, Thomson assigned the rights to two of the relevant patents to Funai, and retained the rights to another.  Vizio alleges that before selling some of its patents to Funai, Thomson licensed the bundle of relevant patents to licensees who needed only to deal Thomson, whose monopoly power was restrained by the FRAND commitment it made to the ATSC.  Vizio now alleges that its Funai charges prices much higher than those charged by Thomson, and that Funai and Thomson conspired to evade the FRAND commitment and split profits.

Right off the top, readers will recognize hints of both N-Data and Ovation, two FTC cases I’ve criticized for expanding the notion that exclusionary conduct might be defined as any business decision that “evades a pricing constraint.”   As I’ve written:

The implicit answer [adopted by the Commission] is that the antitrust laws condemn evasion of pricing constraints.  This answer is getting more and more familiar at the current Commission.  Let’s follow the pattern.  First, Rambus is based on the concept that evasion of patent disclosure rules in the standard setting context violation Section 2 and Section 5.  Second, N-Data is based on the concept that evasion of a contractual pricing constraint in the form of a RAND commitment is a violation of at least section 5 even when the monopoly power is lawfully acquired.  Third, Ovation now adds to the list the evasion of reputational constraints on pricing as the genesis of actionable antitrust conduct.

This case invokes some of the some basic ideas.  At least one of the underlying theories is that Thomson evaded the pricing constraint by transferring its patents to Funai, i.e. does transferring the patent from Thomson to Funai, who is unconstrained by the FRAND commitment, constitute exclusionary conduct under Section 2?

Here’s an excerpt of Judge Matz’s analysis of the Section 2 allegations:

Nor does the allegation that Funai repudiated Thomson’s FRAND commitments constitute a harm to competition. Vizio cites to the Broadcom and Research in Motion cases for the proposition that deceiving a standard setting organization and then evading FRAND commitments can qualify as anticompetitive conduct and can constitute harm to competition. See Broadcom Corp. v. Qualcomm, Inc., 501 F.3d 297, 313-14 (3d Cir. 2007) (holding that a patent holder’s intentionally false promise to license essential proprietary technology on FRAND terms, coupled with a standard setting organization’s reliance on that promise, and the patent holder’s subsequent breach of that promise, constitutes actionable anticompetitive conduct); Research in Motion Ltd. v. Motorola, Inc., 2008 WL 5191922 at *4-7 (N.D. Tex. Dec. 11, 2008) (holding that a refusal to license on agreed-to FRAND terms constitutes a harm to competition). However, other courts have reached the opposite conclusion. See Rambus v. Federal Trade Commission, 522 F.3d 456, 467 (D.C. Cir. 2008) (holding that deceiving a standard-setting organization, thereby avoiding FRAND (there called “RAND”) limits on licensing fees, did not constitute a harm to competition under the Sherman Act). The court in Rambus explained that, even in the context of FRAND licensing agreements, “an otherwise lawful monopolist’s end-run around price constraints, even when deceptive or fraudulent, does not alone present a harm to competition in the monopolized marked.” Rambus, 522 F.3d at 466. The Rambus court cited NYNEX v. Discon, supra, for that proposition, after observing previously that “to the extent [the Broadcom ruling] may have rested on a supposition that there is a cognizable violation of the Sherman Act when a lawful monopolist’s deceit has the effect of raising prices (without an effect on competitive structure), it conflicts with NYNEX.” Id. (citing NYNEX, 525 U.S. 128). As discussed above, Vizio has not explained how the mere transfer of a valid patent from Thomson to Funai created an unlawful monopoly, and so its alleged conduct does not constitute a harm to competition.

Moreover, in both Broadcom and Research in Motion the antitrust defendant itself had entered into a FRAND obligation with the standard setting organization. Here, Vizio’s only allegation that suggests that Funai has any obligations to the ATSC is its conclusory statement that “[w]hen Funai acquired Thomson’s rights to the ’074 patent, specific encumbrances attached to that patent, including Thomson’s obligation to license the ’074 patent to implementers of the ATSC standards, such as Vizio, on a FRAND basis.” FAC ¶ 30. However, Thomson—not Funai—participated in the standard-setting process and entered into the FRAND agreement with the ATSC. FAC ¶¶ 14, 16, 18-19, Ex. C. And, as the FAC alleges, the ATSC Patent Policy requires only that participants provide a written agreement to license on FRAND terms. FAC ¶ 16. Although the allegations might suffice to state an antitrust claim against Thomson under the holding in Broadcom, they do not against Funai. Based on this analysis, Vizio’s claims of unlawful monopolization under Section 2 of the Sherman Act—claims three through five—and unlawful acquisition under Section 7 of the Clayton Act—claim one—must fail.

The next to last sentence is pretty interesting when read along with the first paragraph.  On the one hand, the court notes that the allegations might state a valid Section 2 claim against Thomson under the holding in Broadcom, suggesting that the evasion of constraint theory in Broadcom lives so long as the plaintiff has also alleged that Thomson’s promise as intentionally false at the time it was made to the ATSC, that there was reliance on that promise, and it was subsequently breached.  On the other hand, the first paragraph seems to at least weakly suggest that the court is aligning itself with the D.C. Circuit’s Rambus holding under which even an intentionally false promise or deceptive cannot constitute a Section 2 problem unless the plaintiff also can survive muster under NYNEX, i.e. prove that the defendant is not simply exercising its lawfully acquired ex ante monopoly power.  I don’t mean to suggest these two excerpts are contradictory.  The court is correctly pointing out that even under less restrictive standard in Broadcom, the Section 2 claim against Funai must fail.

As I point out here, I do not believe that Broadcom and Rambus create a circuit split because they turn on the court’s assessment of the defendant’s possession of ex ante monopoly power.  In Broadcom, at the pleading stage, the Third Circuit accepted the allegation as true that the defendant acquired monopoly power as the result of its deceptive conduct; in Rambus, the D.C. Circuit correctly held under NYNEX that the plaintiff faced the burden of proving that the price-increasing deception was also exclusionary, i.e. allowed the defendant to acquire or maintain monopoly power, and ruled that the FTC failed to carry that burden on the facts.

3 responses to An Interesting Patent Holdup Decision out of the Central District of CA: Vizio v. Funai

  1. 

    Michael — that seems like a sensible proposition, and perhaps one that SSOs should adopt in conjunction with any (F)RAND licensing obligations. I.e., any RAND obligation also obliges the patent holder to convey any patents subject to that obligation.

    That said, even as described it doesn’t seem like an antitrust violation.

  2. 

    Aside from the antitrust angle, there is an interesting property angle here. In real property, there are covenants that run with the land. It appears that the defendants in this case may have been arguing by analogy that the FRAND covenant should run with title to the patents.

    Without having seen the pleadings or motions, I don’t know whether this was, in fact, what was argued. But it’s an interesting alternative way to frame the same defense outside antitrust.