PNY Technologies, Inc. v. Sandisk Corporation

Filing 50

ORDER GRANTING 20 29 MOTION to Dismiss with Leave to Amend. Signed by Judge Yvonne Gonzalez Rogers on 4/20/12. (fs, COURT STAFF) (Filed on 4/20/2012)

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1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 8 9 PNY TECHNOLOGIES, INC., 10 Plaintiff, 11 vs. Northern District of California United States District Court 12 ORDER GRANTING SANDISK CORPORATION’S MOTION TO DISMISS WITH LEAVE TO AMEND SANDISK CORPORATION, 13 Case No.: C-11-04689 YGR Defendant. 14 15 Plaintiff PNY Technologies, Inc. (“PNY”) filed suit against Defendant SanDisk Corporation 16 (“SanDisk”) alleging antitrust violations stemming from SanDisk’s extensive patent portfolio in the 17 flash memory technology upstream market. In summary, PNY alleges that SanDisk is misusing the 18 market power inherent in its patent portfolio to demand multi-tiered licensing and royalties in the 19 downstream markets which then suppresses price competition in the United States. PNY’s Complaint 20 alleges Monopolization and Attempted Monopolization under Section 2 of the Sherman Act, 15 21 U.S.C. § 2, (First and Second Counts); Conspiracy under Section 1 of the Sherman Act, 15 U.S.C. § 22 1, between SanDisk and certain of its licensees (Third Count); and state law claims for intentional 23 interference (Fourth Count) and unfair competition under California Business & Professions Code §§ 24 17200 et seq. (Fifth Count). PNY seeks a declaratory judgment, damages, restitution and injunctive 25 relief. 26 SanDisk moves to dismiss all five claims for failure to state a claim pursuant to Rule 12(b)(6) 27 of the Federal Rules of Civil Procedure. In particular, SanDisk argues that the Complaint is not 28 specific enough to meet federal pleading standards in antitrust cases. 1 Having carefully considered the papers and the pleadings submitted, and the argument of 2 counsel, for the reasons set forth below, the Court hereby GRANTS the Motion to Dismiss WITH 3 LEAVE TO AMEND. 4 I. BACKGROUND 5 A. THE MARKETS 6 PNY’s Complaint, Dkt. No. 1, alleges as follows: PNY and SanDisk are competitors in the 7 flash memory market. Id. ¶ 1. Flash memory is a type of removable data storage device for computer 8 memory. Id. ¶¶ 22-23. The technology is used in consumer products such as Universal Serial Bus 9 drives (“USB flash drives”), Compact Flash cards, and solid-state drives. Id. ¶ 23. Consumers 10 throughout the United States use these products which are considered one of the most important 11 forms of data storage in the marketplace. Id. ¶ 27. In 2010 alone, over one billion dollars of flash 12 memory products were sold in the United States. Id. United States District Court 13 A flash memory product is comprised of three parts: one, a “device,” commonly referred to 14 as a memory chip1; two, a “controller,” which acts as the interface between the flash memory device 15 and the computer; and three, a flash memory “system,” which combines the component parts into a 16 “systems product,” such as a USB flash drive, which is the end product sold to the consumer. Id. ¶¶ 17 24-26. The distribution chain that results in the eventual sale of flash memory systems products (such 18 as USB flash drives) has four segments: first, developers and licensors of the flash memory 19 technology needed to manufacture flash memory devices, systems, and products; second, device 20 manufacturers; third, aggregators that purchase component parts and assemble systems products; and 21 fourth, purchasers of “finished” systems products (called resellers) for resale. Id. ¶¶ 29-31, 71. The 22 flash memory device is by far the largest part of the overall cost of any flash memory system or 23 product. Id. ¶ 28. 24 Some companies, such as SanDisk, are vertically-integrated, producing flash memory devices, 25 systems, and products both for their own use (e.g., SanDisk-branded products that are ultimately sold 26 to consumers), and for sale to aggregators and resellers. Id. ¶¶ 30, 33, 71. In 2010, SanDisk-branded 27 28 1 The parties use the terms “device” and “chip” interchangeably in their papers. The Court will use the term “device” in this Order. 2 1 flash memory products accounted for more than 40% of all retail sales of flash memory products in 2 the United States. Id. ¶ 42. Other companies manufacture only flash memory devices. Id. ¶ 29. 3 PNY is an aggregator, which means that it does not manufacture its own flash memory devices, but 4 instead purchases the devices from manufacturers and assembles those devices with other component 5 parts to create a flash memory systems product. Id. ¶¶ 31-33. Aggregators can take advantage of an 6 oversupply of flash memory devices and produce lower-cost flash memory systems products. Id. ¶ 7 33. 8 B. 9 According to the Complaint, SanDisk claims to own more than 1,400 United States patents SANDISK’S PRESENCE IN THE FLASH MEMORY MARKET related to flash memory technology that cover 100% of the flash memory technologies that are or can 11 be used to manufacture or assemble flash memory devices, flash memory systems, or flash memory 12 products for sale in the United States. Id. ¶ 36. PNY alleges there are no closely suitable substitute 13 United States District Court 10 technologies to which a manufacturer or aggregator of flash memory devices, systems, or products 14 can switch to avoid using SanDisk’s flash memory patented technology. Id. ¶ 40. Additionally, PNY 15 alleges that SanDisk has taken the position that any firm manufacturing, assembling, or selling flash 16 memory devices, flash memory systems, or flash memory products in the United States is using one 17 or more of SanDisk’s patents and must pay a royalty to SanDisk or face litigation. Id. ¶¶ 36, 42-43, 18 50-51, 55-83. 19 PNY alleges that there are significant barriers to entering the flash memory market. 20 Specifically, PNY alleges that developing a new portable technology for storing and transferring data 21 that would function as a suitable substitute for flash memory technology could cost billions of dollars. 22 Id. ¶¶ 44-45, 49. And these high costs would prevent new competition from entering the technology 23 market for at least two years. Id. ¶¶ 44, 52. 24 C. 25 PNY alleges that SanDisk uses the specter of expensive and endless patent infringement SANDISK’S ALLEGED ANTICOMPETITIVE LICENSE AND LICENSING PROGRAM 26 litigation to coerce its competitors into signing (under the guise of a settlement) its uniform, non- 27 negotiable license, which gives SanDisk control over the pricing of flash memory technology and 28 products sold to its competitors and, ultimately, to consumers. Id. ¶¶ 1-2, 4-6, 42-43, 50-51, 55-62, 3 1 69-70, 75-76, 80, 85-86, 88, 97, 99, 100-05. According to the Complaint, SanDisk’s license violates 2 the antitrust laws because it requires licensees to: (1) pay multiple royalties on the same product as it 3 is sold downstream, once when the flash memory device is sold by one of SanDisk’s flash memory 4 device manufacturer licensees, and again (after SanDisk’s patent rights have been exhausted) after the 5 flash memory device is incorporated into a “system” or “product” and sold by an aggregator such as 6 PNY, id. ¶¶ 4, 42-43, 50-51, 77-80, 91-99, 116; (2) pay a royalty on worldwide sales (including sales 7 in countries where SanDisk does not have any patent rights), id. ¶¶ 4, 8, 84-89, 116; (3) license an 8 omnibus, unspecified patent portfolio (rather than specific individual patents), id. ¶¶ 4, 84-89, 116; 9 and (4) grant-back to SanDisk a worldwide, royalty-free cross-license to all future flash memoryrelated technological innovations within the scope of the portfolio developed by the licensee, 11 inhibiting efforts to design around SanDisk’s patents and stifling licensees’ incentives to innovate, id. 12 ¶¶ 3-4, 8, 38, 90, 104, 116, 121, 133. Additionally, the royalty structure of SanDisk’s licensing 13 United States District Court 10 agreement allegedly is anticompetitive because it ensures that SanDisk’s competitors: (a) purchase 14 products from SanDisk at prices set by SanDisk; (b) purchase products from a supplier licensed by 15 SanDisk and pay a royalty on patented technology to SanDisk, in addition to the royalty already paid 16 by the licensed supplier; (c) purchase the products from an unlicensed supplier and pay SanDisk a 17 very high royalty; or (d) manufacture the product and pay SanDisk the same very high royalty on 18 sales. Id. ¶ 143. The cost of the royalty is passed on to consumers in the form of increased retail 19 prices. Id. ¶ 88. 20 D. 21 In January 2008, PNY entered into such a licensing agreement with SanDisk in order to settle SANDISK’S ALLEGEDLY PREDATORY BEHAVIOR 22 two patent infringement lawsuits, “under the threat of continuing patent litigation.” Id. ¶ 1. PNY was 23 “willing to enter the license because at that time, 95% of [its] flash memory related purchases were of 24 . . . finished end-user products . . . sold by Toshiba and Samsung.” Id. ¶ 71. “[T]he license was 25 expected to have minimal impact on PNY’s business” because at that time, PNY functioned primarily 26 as a reseller of Toshiba and Samsung flash memory products and the license would not require PNY 27 to pay any royalties on these purchases, and entering into the license would settle SanDisk’s patent 28 infringement lawsuit against PNY. Id. “But as the markets changed and the availability of lower cost 4 1 flash memory devices and systems from other manufacturers grew, PNY changed its purchasing mix 2 to de-emphasize the purchase of flash memory systems products, and instead focus on purchasing the 3 component parts” for assembly and resale. Id. ¶ 72. In addition to the changing market conditions, 4 PNY claims to have altered its purchasing behavior because Toshiba and Samsung’s pricing of 5 finished products (a market in which PNY functioned only as a reseller) “was no longer competitive.” 6 Id. ¶ 73. 7 PNY alleges that SanDisk, Toshiba, Samsung and other vertically-integrated manufacturers 8 conspired to increase or hold steady the prices of the flash memory system products so that resellers, 9 like PNY, would purchase the component parts and assemble the flash memory systems products themselves, and pay a royalty to PNY. Id. ¶ 74. PNY also alleges that SanDisk’s conspiracy with the 11 other vertically-integrated manufacturers (like Toshiba and Samsung), with whom SanDisk also has 12 licenses, has forced low-cost aggregators like PNY to pay duplicate and inflated royalties to SanDisk 13 United States District Court 10 when they purchase flash memory devices, systems, or products from SanDisk or one of its 14 vertically-integrated licensees. Id. ¶¶ 2, 6, 42, 50, 74-80, 93-95, 98, 140-45. Through these licenses, 15 PNY alleges SanDisk ensures that it controls the prices at which flash memory technology and 16 products are sold and SanDisk precludes its competitors from selling low-cost flash memory 17 products. 18 PNY also alleges that SanDisk’s licensing scheme has caused competitors to exit one of these 19 markets, though it does not specify which market. For example, PNY believes that SanDisk entered 20 into a licensing agreement with one of SanDisk’s larger competitors, Buffalo, “that requires Buffalo 21 to exit one or more of the Relevant Markets.” Id. ¶ 82. In addition, PNY alleges that “[s]everal 22 competitors, including Buffalo, have exited or significantly reduced their presence in one or more of 23 the Relevant Markets as a result of SanDisk’s anticompetitive licensing scheme.” Id. ¶ 103. 24 PNY alleges that SanDisk’s licensing and royalty scheme harms competition in the United 25 States markets for flash memory by keeping the prices for flash memory artificially high and under 26 SanDisk’s control. PNY further alleges that SanDisk’s exclusionary licensing and royalty scheme 27 operates to preserve and enhance SanDisk’s existing monopoly power in all flash memory-related 28 5 1 markets or threatens to monopolize additional downstream product markets in violation of Sections 1 2 and 2 of the Sherman Act, 15 U.S.C. § 1 et seq., and California business tort law. 3 II. LEGAL STANDARD To survive a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), “a 4 5 complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is 6 plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. 7 Twombly, 550 U.S. 544, 557 (2007)). In the antitrust context, “a court must determine whether an 8 antitrust claim is ‘plausible’ in light of basic economic principles.” William O. Gilley Enters., Inc. v. 9 Atl. Richfield Co., 588 F.3d 659, 662 (9th Cir. 2009) (citing Twombly, supra, 550 U.S. at 556). Although the court must construe all allegations of material fact in the light most favorable to the 11 plaintiff, “a plaintiff’s obligation to provide the grounds of his entitle[ment] to relief requires more 12 than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not 13 United States District Court 10 do.” Twombly, supra, 550 U.S. at 555 (alteration in original). If the allegations in the complaint fail 14 to give rise to a plausible claim for relief, “‘this basic deficiency should . . . be exposed at the point of 15 minimum expenditure of time and money by the parties and the court.’” Id. at 558 (citations 16 omitted). Twombly was itself an antitrust case and the Supreme Court’s caution to proceed in these 17 cases only upon a complaint with specific allegations is particularly apt. 18 III. DISCUSSION TENSION BETWEEN PATENT RIGHTS AND ANTITRUST CLAIMS 19 A. 20 Courts continue to define at what point conduct stemming from the legitimate exercise of 21 patent rights is transformed into an antitrust claim and/or a defense based on the patent misuse 22 doctrine.2 It has long been held that a “patentee has the exclusive right to manufacture, use and sell 23 his invention.” Zenith Radio Corp. v. Hazeltime Research, Inc., 395 U.S. 100, 136 (1969) (citing 24 Bement & Sons v. Nat’l Harrow Co., 186 U.S. 70, 88-89 (1902)). The Supreme Court continued: 25 “The heart of his legal monopoly is the right to invoke the State’s power to prevent others from 26 utilizing his discovery without his consent. The law also recognizes that he may assign to another his 27 28 2 See discussion of historical context in Geoffrey D. Oliver, Princo v. International Trade Commission: Antitrust Law and the Patent Misuse Doctrine Part Company, 25 ANTITRUST 62, 63 (2011). 6 1 patent, in whole or in part, and may license others to practice his invention.” Id. (internal citations 2 omitted). 3 Although the patent laws grant the inventor a limited monopoly over the patented invention, 4 “the ultimate goal of the patent system is to bring new designs and technologies into the public 5 domain through disclosure.” Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 151 6 (1989); see also, Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617, 626 (2008) (“the primary 7 purpose of our patent laws is not the creation of private fortunes for the owners of patents but is ‘to 8 promote the progress of science and useful arts’”) (quoting Motion Picture Patents Co. v. Universal 9 Film Mfg. Co., 243 U.S. 502, 511 (1917)).3 Thus, the patent laws strike a balance: the inventor is rewarded with a limited patent monopoly, which enables the inventor to reap the financial rewards of 11 the invention, in return for full disclosure of the patented invention and its dedication to the public 12 domain on expiration of the patent. Scott Paper Co. v. Marcalus Mfg. Co., 326 U.S. 249 (1945) 13 United States District Court 10 rehearing denied 326 U.S. 811. The “patent empowers the owner to exact royalties as high as he can 14 negotiate with the leverage of that monopoly,” Brulotte v. Thys Co., 379 U.S. 29, 33 (1964); and, 15 subject to the general law, refuse to license an invention altogether. Image Technical Servs., Inc. v. 16 Eastman Kodak Co., 125 F.3d 1195, 1218 (9th Cir. 1997) (noting that it could find “no reported case 17 in which a court ha[s] imposed antitrust liability for a unilateral refusal to sell or license a patent”). 18 However, once the patent owner has sold or licensed the invention, “it may fairly be said that the 19 patentee has received his reward for the use of the patent.” United States v. Masonite Corp., 316 U.S. 20 265, 278 (1942). 21 Courts have established limits which the patentee must not exceed in employing the leverage 22 of his patent to control or limit the operations of the licensee. A patent owner may not “extend the 23 monopoly of his patent to derive a benefit not attributable to use of the patent’s teachings.” Zenith 24 Radio Corp., supra, 395 U.S. at 136. 25 26 27 28 3 The Patent Clause of the Constitution grants Congress the power “[t]o promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” U.S. Const. art. I, § 8, cl. 8. The means adopted by Congress of promoting the progress of science is by granting the inventor a limited patent monopoly. 7 1 Under the doctrine of patent exhaustion, the initial “authorized sale of an article that 2 substantially embodies a patent exhausts the patent holder’s rights” under the patent. Quanta 3 Computer, Inc., supra, 553 U.S. at 638. After a patent right is exhausted, it is no longer enforceable 4 by the patentee. Id. at 626. Accordingly, a patent holder may not collect a “double royalty,” that is, 5 collect a royalty from both a licensee and a purchaser of the licensee’s product under the same patent 6 for the same patented product without violating the patent exhaustion doctrine. PSC Inc. v. Symbol 7 Techs., Inc., 26 F. Supp. 2d 505, 510 (W.D.N.Y. 1998). However, patent exhaustion is not a cause of 8 action, but an affirmative defense to a patent infringement lawsuit that “prohibits patent holders from 9 selling a patented article and then ‘invoking patent law to control the postsale use of the article.’” 10 ExcelStor Tech., Inc. v Papst Licensing GMBH & Co. KG, 541 F.3d 1373,1376 (Fed. Cir. 2008) 11 (quoting Quanta Computer, Inc., supra, 553 U.S. at 638). 12 While the patent system serves to encourage innovation, the antitrust laws serve to foster United States District Court 13 competition. See Intergraph Corp. v. Intel Corp., 195 F.3d 1346, 1362 (Fed. Cir. 1999) (citing 14 Loctite Corp. v. Ultraseal Ltd., 781 F.2d 861, 866-67 (Fed. Cir. 1985). Thus, the statutory rights 15 extended by intellectual property laws do not confer upon the patent owner a privilege or immunity to 16 violate the antitrust laws. Id.; Atari Games Corp. v. Nintendo of Am., Inc., 897 F.2d 1572, 1576 (Fed 17 Cir. 1990) (patent does not shield patent owner from the antitrust laws). But the Supreme Court has 18 cautioned that even if patent misuse exists, “it does not necessarily follow that the misuse embodies 19 the ingredients of a violation of either § 1 or § 2 of the Sherman Act.” Zenith Radio Corp., supra, 20 395 U.S. at 140. The intersection between these two competing concepts continues to develop. 21 The tension between these concepts is particularly important here, as the gravamen of 22 Plaintiff’s Complaint arises from a change in market conditions and Plaintiff’s current dissatisfaction 23 with the licenses entered into in January 2008. However, because Plaintiff has styled these 24 allegations of patent misuse as violations of antitrust law, they must be analyzed as such under the 25 Twombly standard.4 26 27 28 4 PNY urges the Court to look at the overall scheme alleged in the Complaint to determine whether it has stated a claim for antitrust violation. Pl.’s Opp’n 14 (citing Continental Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 699 (1962) (courts should not “tightly compartmentaliz[e] the various factual components and wip[e] the slate clean after scrutiny of each”). While the slate need not be “wiped clean” after 8 1 2 3 4 5 6 7 8 9 10 11 12 United States District Court 13 14 15 16 17 18 19 B. SHERMAN ACT § 2 CLAIMS: MONOPOLIZATION AND ATTEMPTED MONOPOLIZATION Section 2 of the Sherman Act makes it unlawful to monopolize, attempt to monopolize, or combine or conspire to monopolize.5 PNY brings claims for both Monopolization (Count I) and Attempted Monopolization (Count II) in each of the flash memory-related markets. To state a cause of action for the offense of monopoly under Section 2 of the Sherman Act, a plaintiff must plead two elements: (1) possession of monopoly power in the relevant market; and (2) willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident. United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966). If a defendant does not possess monopoly power, a Sherman Act Section 2 claim may be maintained for attempted monopolization if (1) there is “a dangerous probability” that the defendant may be able to achieve monopoly power and (2) the defendant is engaged in predatory or anticompetitive conduct with (3) “a specific intent to monopolize.” Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 456 (1993); Cost Mgmt. Servs., Inc. v. Wash. Natural Gas Co., 99 F.3d 937, 949 (9th Cir. 1996) (the elements for attempted monopolization are “(1) specific intent to control prices or destroy competition; (2) predatory or anticompetitive conduct to accomplish monopolization; (3) dangerous probability of success; and (4) causal antitrust injury”). Additionally, because PNY seeks relief under Sections 4 and 16 of the Clayton Act, 15 U.S.C. §§ 15, 26,6 it must allege that it has suffered (Section 4) or faces the threat of (Section 16) antitrust 20 21 22 23 24 25 26 27 28 scrutiny of a particular theory, each legal theory must be examined for its sufficiency separately. In City of Groton v. Conn. Light & Power Co., 662 F.2d 921, 928-29 (2d Cir. 1981) (quoted in Intergraph Corp., supra, 195 F.3d at 1367) , the Second Circuit explained: [W]e reject the notion that if there is a fraction of validity to each of the basic claims and the sum of the fraction is one or more, the plaintiffs have proved a violation of section 1 or 2 of the Sherman Act. The proper inquiry is whether, qualitatively, there is a “synergistic effect.” While the ultimate determination of an antitrust violation rests on the “overall combined effect” of the alleged acts, see City of Anaheim v. S. Cal. Edison Co., 955 F.2d 1373, 1376 (9th Cir. 1992), “there can be no synergistic result” if none of the acts alleged is an antitrust violation. Cal. Computer Prods. v. Int’l Bus. Machs., Corp., 613 F.2d 727 (9th Cir. 1979). 5 15 U.S.C. § 2. Monopolizing trade a felony; penalty Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony . . . 9 1 injury of “‘the type the antitrust laws were designed to prevent and that flows from that which makes 2 defendants’ acts unlawful.’” Cargill, Inc. v. Monfort of Colo., Inc., 479 U.S. 104, 113 (1986) 3 (quoting Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977)). 4 The first step in the analysis is to define the relevant market or markets. No dispute appears to 5 exist that the relevant markets are (a) the upstream market consisting of the flash memory technology 6 itself and (b) the downstream markets flowing therefrom consisting of flash memory devices, 7 systems, and products. Further, all relevant markets are based only in the United States. 8 Accordingly, the Court will discuss the remaining elements in turn. The Court further notes, at this 9 juncture, that because PNY does little to separate the facts alleged for the conduct relative to each 10 market, the discussion of each element, to the extent necessary, will be analyzed with each specific 11 market in mind. 1. 13 United States District Court 12 All Section 2 Sherman Act claims require that the plaintiff adequately plead either Nature of SanDisk’s Market Power in the Relevant Markets 14 monopoly power or “a dangerous probability” that the defendant may be able to achieve monopoly 15 power. Newcal Indus. v. Ion Office Solution, 513 F.3d 1038, 1044 n.3 (9th Cir. 2008). The Supreme 16 Court defines monopoly power as the “power to control prices or exclude competition.” See United 17 States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 393 (1956). For purposes of a motion to 18 dismiss, a plaintiff may plead this market power through allegations concerning (i) direct evidence 19 showing the effects of the anticompetitive behavior or (ii) indirect evidence of market power. “If the 20 plaintiff puts forth evidence of restricted output and supracompetitive prices, that is direct proof of 21 the injury to competition which a competitor with market power may inflict, and thus, of the actual 22 exercise of market power.” Rebel Oil Co., Inc. v. Atl. Richfield Co., 51 F.3d 1421, 1434 (9th Cir. 23 1995) (summary judgment). To demonstrate market power indirectly, or circumstantially, a plaintiff 24 must define the relevant market, and show that (i) the defendant owns a dominant share of that 25 26 27 28 6 Section 4 of the Clayton Act provides that “any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefor.” 15 U.S.C. § 15. Section 16 of the Clayton Act provides that “[a]ny person, firm, corporation, or association shall be entitled to sue for and have injunctive relief . . . against threatened loss or damage by a violation of the antitrust laws.” 15 U.S.C. § 26. 10 1 market and (ii) there are significant barriers to entry and existing competitors lack the capacity to 2 increase their output in the short run. Id. at 1439 (the “barriers to entry” test looks at not only 3 whether “there are significant barriers to entry [but also whether] . . . existing competitors lack the 4 capacity to increase their output in the short run”). 5 a) Upstream Market: flash memory technology 6 i. 7 PNY alleges that SanDisk is a monopolist in the flash memory Market share technology market because SanDisk purports to own 100% of the United States patents in flash 9 memory technology. Complaint ¶ 36. Courts generally require a 65% market share to establish a 10 prima facie showing of market power. Image Technical Servs., supra, 125 F.3d at 1206 (evidence 11 supported jury verdict finding defendant controlled monopoly share of parts market where jury 12 instruction required 65% market share in order to find that defendant monopoly power). Thus, 13 United States District Court 8 although ownership of a patent does not necessarily confer market power, see Illinois Tool Works, 14 Inc. v. Indep. Ink, Inc., 547 U.S. 28 (2006), the allegation that SanDisk owns 100% of the technology 15 patents is sufficient to plead a dominant share of the market. 16 ii. 17 PNY combines its allegation of 100% ownership of United States Barriers to entry 18 patents with other allegations, showing not just a dominant market share, but the ability to control 19 prices and the existence of entry barriers. Specifically, PNY alleges: “there are no closely suitable 20 technologies to which a manufacturer of flash memory systems products could switch in the event of 21 a price increase for the patents SanDisk claims cover all forms of flash memory technology.” 22 Complaint ¶ 40. In other words, if SanDisk owns all the flash memory technology patents, it has the 23 ability to set the price to license its patents. Additionally, PNY alleges that the flash memory 24 technology market is characterized by high entry barriers, which would prevent new competition 25 from entering the market. Id. ¶¶ 44-46, 52, 118, 130. To support this factual conclusion PNY further 26 alleges that new competitors would require two years of time and billions of dollars in capital 27 investment to develop the technology to compete in this upstream market. Id. 28 11 1 SanDisk does not dispute the significant investment to develop flash memory technology, but 2 instead argues that PNY fails to allege any facts of market power or exclusionary conduct beyond that 3 inherent in SanDisk’s patents. SanDisk’s Motion to Dismiss, Dkt. No. 29, (“Mot. to Dismiss”) 13. 4 SanDisk notes that PNY alleges that “alternative designs [of flash memory systems products] exist 5 that do not infringe some or all of SanDisk’s patents.” Id. (citing Complaint ¶ 83). Thus, according 6 to SanDisk, both the availability of competing technologies and the existence of other flash memory 7 technology patent holders negate any inference that SanDisk is a monopolist in the upstream flash 8 memory technology market. Id. 9 Based upon the specificity of the allegations in the Complaint, which support at least the inference of SanDisk’s total dominance of the upstream market, the Court finds that PNY has 11 sufficiently pled this element of a Section 2 Sherman Act violation for monopolization of the 12 upstream flash memory technology market. Consequently, the corresponding element under a claim 13 United States District Court 10 for attempted monopolization is satisfied as an alternative theory. 14 b) 15 With respect to the downstream markets consisting of (i) devices, (ii) systems, 16 and (iii) products, PNY alleges that SanDisk has a “monopolistic grip” over these markets and brings 17 Section 2 Sherman Act claim under theories of both monopolization and attempted monopolization. 18 Complaint ¶¶ 42, 50. 19 Downstream Markets: flash memory devices, systems, and products PNY alleges that SanDisk possesses the power to control prices and exclude competition in 20 the downstream markets and, thus, argues that it has alleged direct proof that SanDisk is a monopolist 21 in all the downstream markets.7 The conclusory allegations, which mirror the requisite elements, are 22 based on the allegation that SanDisk uses its licenses to extract a royalty on the same patented 23 technology on all downstream market sales, which has the effect of controlling prices. Pl.’s Opp’n 24 16-17 (citing Complaint ¶¶ 2, 4-6, 38, 74, 76, 80, 88, 97, 99, 101-02, 104, 117, 121, 128-29, 133, 25 142-43, 151). It is unclear from the Complaint or PNY’s opposition brief how collecting royalties 26 27 28 7 PNY’s reasoning is somewhat circular: “SanDisk’s anticompetitive licensing scheme has given it the power to control prices and exclude competition, as evidenced by SanDisk’s actual exercise of control over prices and the actual exclusion of competition in the Relevant Markets.” Complaint ¶ 117. 12 1 demonstrates the ability to set prices. Perhaps there is an effect, but whether the effect is specific to 2 PNY or to the market generally is an important distinction. Without more, these allegations do not 3 support the claim that SanDisk has the power to control prices and thus, PNY has not alleged facts to 4 show market power directly. See United States v. Syufy Enters., 903 F.2d 659, 670 (9th Cir. 1990) 5 (defendant lacked power to control prices where evidence showed he did not possess power to set 6 prices). 7 PNY further suggests that it has plausibly alleged that SanDisk has the power to exclude competition based on the allegation that SanDisk entered into contracts with “several competitors, 9 including Buffalo, a large manufacturer of electronic devices,” which required them “to exit one or 10 more of the Relevant Markets.” See Complaint ¶¶ 82, 103. PNY fails to specify which market the 11 competitors allegedly exited. Moreover, PNY needs to support this conclusion with facts that show 12 SanDisk has the “power to exclude competition from the relevant market generally, not just to 13 United States District Court 8 exclude a particular competitor.” L.A. Land Co. v. Brunswick Corp., 6 F.3d 1422, 1426-27 (9th Cir. 14 1993). The allegation that SanDisk contracted with a small number8 of competitors to exit “one or 15 more of the Relevant Markets” does not support the conclusion that SanDisk has sufficient power to 16 exclude all competition generally from any of the downstream markets. See id. Further, unlike the 17 specific claims of exclusionary conduct and suppression of competition in Continental Ore, supra, 18 PNY has identified only one specific instance of a competitor leaving the market. See 370 U.S. at 19 694 (alleging defendants’ monopolistic and restrictive practices caused producers and distributors of 20 iron ore, including plaintiffs, to be eliminated from market). 21 The facts alleged do not show directly that SanDisk has market power in any of the 22 downstream markets. Accordingly, the Court next will analyze whether PNY alleges sufficient facts 23 concerning market share and barriers to entry in any of the downstream markets to show indirectly 24 that SanDisk has monopoly power or a dangerous probability thereof. 25 26 27 28 8 The Court assumes that PNY uses the term “several” in its ordinary meaning: a small number; more than two or three but not very many. OXFORD ENGLISH DICTIONARY ONLINE, (last visited Apr. 17, 2012). 13 i. 1 In terms of market share, PNY alleges that SanDisk has at least a 40% 2 3 4 5 6 7 8 9 10 11 12 United States District Court 13 14 15 16 17 18 19 20 21 22 23 24 Market share market share of retail sales of flash memory products, such as USB flash drives. Id. ¶¶ 36, 42. PNY admits that it does not know SanDisk’s market share in the two other downstream markets, but alleges that SanDisk exerts direct control over those downstream markets through its uncompetitive licenses. As stated above, generally, courts require a 65% market share to establish a prima facie showing of monopolistic market power. See Image Technical Servs., supra, 125 F.3d at 1206. PNY’s Complaint in its current form at best articulates only a 40% share in the retail market for products. With respect to the other two downstream markets, the allegations regarding this element are wholly lacking. Accordingly, PNY has failed to plead sufficient facts supporting an allegation of monopoly power in these downstream markets either directly or circumstantially. The next question is whether PNY has sufficiently alleged the first element regarding market power to state a claim for attempted monopolization. PNY must plead facts sufficient to allege that “a dangerous possibility” exists that SanDisk may be able to achieve monopoly power. In Rebel Oil, supra, the Ninth Circuit found a market share of 44% to be sufficient in an attempt case, although it cautioned against a purely mathematical analysis. 51 F.3d at 1438 & n.10. However, PNY admits that it has does not know the extent of SanDisk’s share at all for the downstream markets for (i) flash memory devices or (ii) flash memory systems. Without any quantitative or qualitative allegations of market share, PNY may not pursue claims for attempted monopolization of the flash memory devices or systems market. By contrast, PNY does allege that SanDisk possesses a 40% share of the retail market for flash memory products. A 40% share of the retail market is a sufficient share of the market for an attempt case provided there are barriers to entering the market. 25 ii. Barriers to entry 26 To establish, as PNY alleges, that SanDisk has a “monopolistic grip” 27 over the downstream markets, PNY also must allege facts that show there are significant barriers to 28 entry and that existing competitors lack the capacity to increase their output in the short run. Rebel 14 1 Oil, supra, 51 F.3d at 1439. There are no factual allegations that could support the conclusion that 2 there are barriers to entry in any of the downstream markets. As an initial matter, PNY’s allegations 3 of barriers to entry into the downstream market focus on barriers existing in the upstream market. 4 PNY alleges that significant barriers exist because it would require two years of time and billions of 5 dollars in capital investment to develop new technology. Complaint ¶¶ 44-45, 52. However, the flash 6 memory technology market, which PNY defines as “the technology needed to manufacture, import, 7 and sell flash memory devices, systems, and products,” id. ¶ 35, is not the relevant market to analyze 8 barriers to entering the downstream markets. PNY does not allege facts of such barriers to entering 9 into any of the downstream markets. In addition, the facts alleged do not show that existing competitors lack the capacity to 11 increase output in the short run; actually, the facts alleged in the Complaint show the opposite. 12 According to the Complaint, after SanDisk and other vertically-integrated firms conspired to increase 13 United States District Court 10 prices in the flash memory systems products market to a supracompetitive level, PNY and other 14 companies increased output in the flash memory systems products market. Id. ¶¶ 72-75. Thus, the 15 evidentiary facts, which are pled – that existing competitors increased output in the short run in 16 response to a price increase – contradict PNY’s conclusion that existing competitors do not have the 17 capacity to increase output in the short run. 18 Based upon the foregoing, the Court finds that PNY has not sufficiently pled that SanDisk has 19 a monopoly in any of the downstream markets or that there is “a dangerous probability” that SanDisk 20 may be able to achieve monopoly power in any of the downstream markets. Thus, PNY fails to state 21 a claim for monopolization or attempted monopolization of the downstream markets for flash 22 memory devices, systems, and products. 23 2. Allegations of Anti-Competitive Conduct 24 a) 25 For a claim of monopoly, the second and final element to be pled “is the use of Legal Framework 26 that monopoly power to foreclose competition, to gain a competitive advantage, or to destroy a 27 competitor.” Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 482-83 (1992) 28 (quoting United States v. Griffith, 334 U.S. 100, 107 (1948)). If SanDisk uses its license “as part of a 15 1 scheme of willful acquisition or maintenance of monopoly power, it will have violated § 2.” Id. 2 (citing Grinnell Corp., supra, 384 U.S. at 570-71; United States v. Aluminum Co. of Am., 148 F.2d 3 416, 432 (2d Cir. 1945); Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 600-605 4 (1985). Thus, mere possession of monopoly power will not be found unlawful unless it is 5 accompanied by an element of anticompetitive conduct done with the intent to maintain or acquire a 6 monopoly. 7 Similarly, for a claim of attempted monopolization, a plaintiff must allege facts to 8 demonstrate that the defendant is engaged in predatory or anticompetitive conduct with “a specific 9 intent to monopolize.” Spectrum Sports, Inc., supra, 506 U.S. at 456. Or, as further explained by the Ninth Circuit, the plaintiff must allege “predatory or anticompetitive conduct to accomplish 11 monopolization” with the “specific intent to control prices or destroy competition.” Cost Mgmt. 12 Servs., Inc., supra, 99 F.3d at 949. Therefore, the relevant inquiry for a Section 2 claim of attempted 13 United States District Court 10 monopolization is whether the defendant has engaged in improper conduct that has or is likely to 14 have the effect of controlling prices or excluding competition, thus, creating or maintaining market 15 power. See PepsiCo, Inc. v. Coca-Cola Co., 315 F.3d 101, 108 (2d Cir. 2002). 16 b) 17 PNY alleges that SanDisk has either extended or sought to extend its patent Factual Allegations 18 monopolies related to flash memory technology, devices, systems, and products beyond their lawful 19 grants through (1) anticompetitive terms in its uniform, nonnegotiable license (double royalty, 20 worldwide royalty-free cross license on future innovations, payment of royalties on worldwide sales, 21 and portfolio licensing of patents); and (2) execution of its coercive licensing scheme against all of its 22 low-price competitors in the United States markets for flash memory technology, devices, systems, 23 and products. Complaint ¶¶ 1-6, 8, 38, 42-43, 50-51, 55-62, 69-70, 75-80, 84-99, 100-05, 116, 121, 24 133. 25 An overarching inadequacy with PNY’s Complaint is its failure to distinguish factual 26 allegations regarding the alleged antitrust violations without distinguishing between and among the 27 various markets and causes of action. The Complaint admits that SanDisk’s monopoly in the flash 28 memory technology market is a consequence of the patent laws. The Complaint is devoid of any 16 1 allegations of “willful acquisition” of this monopoly. Further, while PNY alleges “anticompetitive 2 conduct” generally, it fails to relate that conduct to the maintenance of SanDisk’s legally obtained 3 monopoly of the patented technology. Accordingly, at its most basic level, PNY fails to state a 4 Section 2 claim for monopolization in the flash memory technology market.9 5 iii. 6 First, PNY alleges that SanDisk’s licensing agreements violate the Conduct Relative to the Licenses patent exhaustion doctrine because SanDisk collects a royalty on the sale of a flash memory device 8 twice: first when the device is sold by the manufacturer and PNY charges a second royalty on the 9 sale of the same device after the device is incorporated into a flash memory system or product. Pl.’s 10 Opp’n 10-11; Complaint ¶ 79. To the extent PNY believes SanDisk is charging a double royalty on 11 its patents, PNY needs to set out its claim more clearly to state a Sherman Act claim. The Complaint 12 alleges that any firm manufacturing, assembling or selling flash memory devices, systems or products 13 United States District Court 7 is practicing one of SanDisk’s patents and thus must pay SanDisk a royalty. See id. ¶ 36. The 14 Complaint also alleges that the patent portfolio consists of 1,400 patents. Id. This suggests that 15 SanDisk is not collecting a “double royalty,” but rather enforcing its rights under the patent laws by 16 collecting a separate royalty for a different set of patent rights. Accordingly, PNY has failed to allege 17 anticompetitive conduct. 18 Second, SanDisk’s license allegedly requires licensees to “grant-back” a “cross-license” that 19 covers any new technological innovations developed by the licensee on flash memory-related 20 technology within the scope of the patent portfolio license, thereby stifling the incentive to innovate. 21 Id. ¶ 90. According to the Complaint, “requiring licensees to share their future technological 22 innovations with SanDisk on a worldwide royalty-free basis” is anticompetitive because “even if a 23 licensee develops or obtains access to an alternative technology that it could use to practice fewer or 24 25 26 27 28 9 PNY alleges in its Complaint that Kingston’s Counterclaim in SanDisk Corp. v. Kingston Tech. Co., 10-cv-00243 (W.D. Wis.) survived a motion to dismiss. In its opposition, it adds that “PNY’s allegations are nearly identical to the claims that were the subject of a trial in the Western District of Wisconsin.” Pl.’s Opp’n 1-2. The Counterclaim in Kingston (which was filed under seal) does not nudge PNY’s claims in this case across the line from possible to plausible. Moreover, the Court notes that in the Kingston, after a full trial on the merits, the Judge’s findings of fact do not support many of PNY’s allegations about SanDisk’s market power or the barriers to entry into the downstream markets. 17 1 none of SanDisk’s patents, the licensee would still be required to pay a royalty to SanDisk on any 2 sales of the new product and SanDisk would have the right to use the new technology on a worldwide 3 royalty-free basis.” Complaint ¶¶ 4(d), 90. PNY alleges that this “grant-back” provision in 4 SanDisk’s license is part of SanDisk’s unlawful scheme to maintain its market power and suppress 5 competition. 6 There is nothing inherently illegal or anticompetitive about a grant-back provision in a patent 7 license. Transparent-Wrap Mach. Corp. v. Stokes & Smith Co., 329 U.S. 637, 647 (1947) (finding no 8 antitrust behavior and holding grant-back provision “is not per se illegal and unenforceable,” but 9 noting the possibility of abusing this practice). With respect to this claim, the mere transfer of a valid patent “has no antitrust significance,” but merely shifts a lawful monopoly to different hands.” See 11 Brunswick Corp. v. Riegel Textile Corp., 752 F.2d 261, 266 (7th Cir. 1984). To show that a grant- 12 back provision is unlawful, PNY must allege facts that demonstrate a restraint on competition that 13 United States District Court 10 violates the antitrust laws. See Cutter Laboratories v. Lyophile-Cryochem Corp., 179 F.2d 80, 92 14 (9th Cir. 1949) (citing United States v. Line Material Co., 333 U.S. 287 (1948); Morton Salt Co. v. 15 Suppiger Co., 314 U.S. 488 (1942); and Hartford-Empire Co. v. United States, 323 U.S. 386 (1945)). 16 While it is possible that, as PNY alleges, the grant-back provision is part of an overall scheme 17 by SanDisk to maintain control of a patent monopoly in the flash memory technology market, PNY 18 does not allege facts to show that the grant-back provision is anticompetitive. Instead, PNY alleges 19 the conclusion that the license provision violates the antitrust laws but no facts to support such a 20 conclusion. Indeed, though PNY alleges that the grant-back provision lessens the incentive to 21 innovate, PNY stops short of alleging that this licensing provision actually has stifled innovation. See 22 Complaint ¶¶ 3, 90.10 To state a Section 2 Sherman Act claim based upon the grant-back provision, 23 PNY will need to do more than allege the ultimate conclusion of anticompetitive behavior; it will 24 need to allege facts, which if proven, would establish anticompetitive conduct. 25 26 27 28 10 At best, PNY alleges patent misuse through this licensing provision. Complaint ¶ 90. While this may suffice as an equitable defense to a patent infringement lawsuit, it stops well short of establishing a Sherman Act violation. 18 1 Third, PNY alleges that the license is anticompetitive because it requires a licensee to pay for 2 a broad and unspecified patent portfolio, rather than specific, individual patents; and to pay royalties 3 on worldwide sales, which would include sales in geographic markets that are not covered by its 4 patents. Id. ¶¶ 84-86.11 The fact that PNY entered into a form license over which SanDisk was able 5 to negotiate more favorable terms does not constitute anticompetitive conduct for antitrust purposes. 6 Spectrum Sports, Inc., supra, 506 U.S. at 458 (“The law directs itself not against conduct which is 7 competitive, even severely so, but against conduct which unfairly tends to destroy competition 8 itself.”). PNY must allege facts – not conclusions – that would tend to demonstrate anticompetitive 9 conduct that has the effect of maintaining, or a dangerous probability of creating, a monopoly. 10 11 For the reasons set forth above, PNY has not sufficiently alleged the anticompetitive behavior required to state a Section 2 Sherman Act claim for monopolization or attempted monopolization. 3. 13 United States District Court 12 To bring a private action for violation of the antitrust laws, PNY must allege that it has 14 suffered or faces the threat of antitrust injury of “‘the type the antitrust laws were designed to prevent 15 and that flows from that which makes defendants’ acts unlawful.’” Cargill, Inc. v. Monfort of Colo., 16 Inc., 479 U.S. 104, 113 (1986) (quoting Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 17 489 (1977)). Thus, it is not enough to allege that the complained of acts are linked to anticompetitive 18 conduct, “unless [the injury] is attributable to an anti-competitive aspect of the practice under 19 scrutiny.” Atl. Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 334 (1990). SanDisk argues that 20 PNY does not allege causal antitrust injury because the alleged injury flows from the financial terms 21 of the parties’ license agreement, to which PNY willingly and voluntarily agreed, rather than any 22 claimed competition-reducing conduct by SanDisk. Mot. to Dismiss 6-8. PNY counters that its 23 alleged injury flows directly from the oppressive SanDisk license itself, and the fact that PNY Antitrust Injury 24 25 26 27 28 11 SanDisk cites court cases upholding, as procompetitive, licensing agreements, much like its contract with PNY, requiring royalty payments on sales of products not covered by the licensor’s patents where the parties’ contract contained a clause stating that this method for calculating royalties was a convenient means to calculate royalties. Mot. to Dismiss 7-9. Because all of the cases cited were decided on with the benefit of a full evidentiary record, either following trial or on summary judgment, it is not clear whether, as a matter of law, because the parties’ contract contains such a convenience of the parties license recital, PNY is precluded from alleging that the method for calculating royalties is anticompetitive. 19 1 submitted to SanDisk’s market power and coercion when it signed SanDisk’s license does not 2 immunize the terms of that license from the antitrust laws. Pl.’s Opp’n 7. Although in one paragraph 3 PNY indicates that it entered into the contract willingly, elsewhere it alleges SanDisk used coercion 4 to force the terms of the contract upon PNY. 5 The “injury” alleged here arises out of the payment of royalties to practice SanDisk’s patents. 6 SanDisk argues that this is not antitrust injury because all of PNY’s alleged harm flows from the 7 terms of the contract into which it voluntarily entered. Because PNY has not adequately pled that it 8 entered into the unfavorable license with SanDisk as a result of anticompetitive conduct,12 or how 9 exactly it has suffered antitrust injury based upon the terms of the contract, it cannot rely upon its 10 11 12 performance of the terms of that contract to establish causal antitrust injury. Based on the foregoing analysis, the Court hereby GRANTS the Motion to Dismiss as to PNY’s Section 2 Sherman Act claims, Counts I and II WITH LEAVE TO AMEND. SHERMAN ACT § 1 CONSPIRACY CLAIM: COMBINATION IN RESTRAINT OF TRADE13 United States District Court 13 C. 14 Liability under Section 1 of the Sherman Act, 15 U.S.C. § 1, requires a “contract, combination 15 . . ., or conspiracy, in restraint of trade or commerce.” Twombly, supra, 550 U.S. at 548. To state a 16 claim under Section 1 of the Sherman Act, the claimant must plead not just ultimate facts (such as a 17 conspiracy), but evidentiary facts which, if true, will prove: (1) a contract, combination or conspiracy 18 among two or more persons or distinct business entities; (2) by which the persons or entities intended 19 to harm or restrain trade or commerce; (3) which actually injures competition. Id. “[A] conclusory 20 allegation of agreement at some unidentified point does not supply facts adequate to show illegality” 21 for purposes of Section 1. Id. at 557. To plead an “agreement between antitrust co-conspirators, the 22 complaint must allege facts such as a ‘specific time, place, or person involved in the alleged 23 24 25 26 27 28 12 PNY alleges that it entered into the agreement to put an end to a patent infringement lawsuit PNY brought against it, but it does not suggest that the lawsuit was a “sham litigation” or “bad faith prosecution.” See Handgards, Inc. v. Ethicon, Inc., 601 F.2d 986 (9th Cir. 1979) (prosecution of patent enforcement actions are presumed to be in good faith, but if prosecuted in bad faith, it may violate antitrust laws). 13 15 U.S.C. § 1. Trusts, etc., in restraint of trade illegal; penalty Every 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 declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony . . . 20 1 conspiracies’ to give a defendant seeking to respond to allegations of a conspiracy an idea of where to 2 begin.” Kendall v. Visa U.S.A., Inc., 518 F.3d 1042 (9th Cir. 2008) (quoting Twombly, supra, 550 3 U.S. at 565 n.10). 4 PNY has failed to allege any evidentiary facts of a conspiracy. Rather, it alleges “[u]pon 5 information and belief, SanDisk and certain manufacturers of flash memory technology products 6 licensed by SanDisk, including Toshiba, Samsung, and others have entered into continuing and 7 ongoing contracts, combinations, agreements, and/or conspiracies to unreasonably restrain trade and 8 commerce in the Relevant Markets.” Id. ¶ 140. This “conclusory allegation of agreement at some 9 unidentified point does not supply facts adequate to show illegality” for purposes of Section 1. 10 Twombly, supra, 550 U.S. at 557. Accordingly, PNY fails to plead evidentiary facts to state a cause 11 of action for a Section 1 conspiracy.14 12 United States District Court 13 Based on the foregoing analysis, the Court hereby GRANTS the Motion to Dismiss as to PNY’s Section 1 Sherman Act claim, Count III, WITH LEAVE TO AMEND. 14 D. 15 The elements for a cause of action for intentional interference with contractual relations and COUNT IV – INTENTIONAL INTERFERENCE WITH BUSINESS RELATIONSHIPS 16 for intentional interference with prospective economic advantage essentially are: (1) a contract or 17 other economic relationship between plaintiff and a third party; (2) the defendant’s knowledge of the 18 contract or relationship; (3) defendant’s intentional acts designed to induce a breach or disrupt the 19 contract or relationship; (4) actual breach or disruption; and (5) damage. Quelimane Co. v. Stewart 20 Title Guaranty Co., 19 Cal. 4th 26, 55 (Cal. 1998); Korea Supply Co. v. Lockheed Martin Corp., 29 21 Cal. 4th 1134, 1153 (Cal. 2003). PNY provides no facts from one can discern the relationships with 22 which SanDisk has interfered (or at least more specific than every contractual relationship PNY has 23 ever or will ever enter into). PNY’s alleges: “PNY has existing and valuable business relationships, 24 as well as reasonable expectations of further and future relationships, with manufacturers, retailers, 25 26 27 28 14 PNY argues in its opposition that through discovery it expects to get more information about the contracts. Pl.’s Opp’n 20. Unfortunately, PNY cannot save its Section 1 claim based on the expectation that through discovery it might find a factual basis for its conspiracy claim. In Twombly, supra, the Supreme Court cautioned “a district court must retain the power to insist on some specificity in pleading before allowing a potentially massive factual controversy to proceed.” 550 U.S. at 558. Based on the present state of the pleadings, PNY may not obtain this discovery. 21 1 and purchasers relating to flash memory technology,” that “SanDisk was aware of these prospective 2 business and actual contractual relationships and engaged in intentional and wrongful conduct 3 designed or calculated to disrupt and interfere with those relationships” and that “SanDisk’s conduct 4 in interfering with such prospective business and actual contractual relations is intentional, malicious, 5 and without justification.” Complaint ¶¶ 149-151. These are not “facts.” They are legal conclusions. 6 The parties dispute whether PNY needs to identify the particular third-party with whom Plaintiff has a relationship. The contractual party “must be identified in some manner.” Ramona 8 Manor Convalescent Hosp. v. Care Enters., 177 Cal. App. 3d 1120, 1133 (Cal. Ct. App. 1986). Here, 9 PNY provides no facts from which the Court can discern impacted relationships. Without any details 10 of the relationships with which SanDisk allegedly interfered, SanDisk cannot be expected to frame an 11 answer to these allegations. Accordingly, PNY has failed to state a claim for either intentional 12 interference with contractual relations or intentional interference with prospective economic 13 United States District Court 7 advantage. 14 Based on the foregoing analysis, the Court hereby GRANTS the Motion to Dismiss as to 15 PNY’s claim for intentional interference with contractual relations and for intentional interference 16 with prospective economic advantage, Count IV, WITH LEAVE TO AMEND. 17 18 19 20 21 22 23 24 25 26 27 28 E. COUNT V – UNFAIR COMPETITION IN VIOLATION OF CALIFORNIA BUSINESS & PROFESSIONS CODE §§ 17200 et seq. California’s UCL statute prohibits “any unlawful, unfair or fraudulent business act or practice.” Cal. Bus. Prof. Code. § 17200; Cel-Tech Comm., Inc. v. L.A. Cellular Tel. Co., 20 Cal. 4th 163, 180 (Cal. 1999). PNY purports to plead claims under the unlawful and unfair prongs of the UCL. Complaint ¶¶ 158-59. With respect to PNY’s allegations under the unlawful prong of the UCL, PNY simply borrows from its federal antitrust claims, claiming that the alleged federal antitrust violations are the “unlawful” conduct which the UCL claim is directed to. Id. ¶ 159. If the antitrust claims were adequately plead, this would establish the unlawful prong. But because PNY has failed to adequately plead its antitrust claims, its unlawful-prong UCL claim necessarily fails as well. See Ingels v. Westwood One Broadcasting Servs., Inc., 129 Cal. App. 4th 1050, 1060 (Cal. Ct. App. 2005) (“‘If the [underlying] claim is dismissed, then there is no ‘unlawful’ act upon which to base [] the derivative 22 1 Unfair Competition claim’”) (second alteration in original); Scripps Clinic v. Sup. Ct., 108 Cal. App. 2 4th 917, 934-39 (Cal. Ct. App. 2003); see also Krantz v. BT Visual Images, 89 Cal. App. 4th 164 3 (Cal. Ct. App. 2001) (the viability of an unlawful UCL claim stands or falls with the underlying 4 claim). Likewise, PNY’s unfair-prong UCL claim also is deficient. Where, as here, a competitor 5 6 alleges a violation of the UCL’s unfair-prong, “unfair” “means conduct that threatens an incipient 7 violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are 8 comparable to or the same as a violation of the law, or otherwise significantly threatens or harms 9 competition.” Cel-Tech Commc’ns, supra, 20 Cal. 4th at 186-87; Complaint ¶ 1 (“PNY and SanDisk 10 are competitors.”). Because PNY has not adequately pled its federal antitrust claims, and because its 11 UCL claims are not materially different than its federal antitrust claims, it follows then, that PNY’s 12 claim under the unlawful and unfair prongs of the UCL fails as well.15 United States District Court 13 Based on the foregoing analysis, the Court hereby GRANTS the Motion to Dismiss as to 14 PNY’s claim for Unfair Competition in Violation of Cal. Bus. Prof. Code §§ 17200 et seq., Count V, 15 WITH LEAVE TO AMEND. 16 IV. 17 CONCLUSION For the reasons set forth above, Defendant’s Motion to Dismiss is GRANTED WITH LEAVE 18 TO AMEND. Plaintiff shall file an amended complaint within 28 days from the date this Order is 19 filed. Defendant shall file its response to the amended complaint within 28 days of service. 20 This Order Terminates Docket Number 29. IT IS SO ORDERED. 21 22 23 April 20, 2012 _________________________________ YVONNE GONZALEZ ROGERS UNITED STATES DISTRICT COURT JUDGE 24 25 26 27 28 15 In its opposition, PNY indicates that the claim for intentional interference could satisfy the unfair prong. Because this is not pled as a basis for the UCL claim, and also because the claim for intentional interference fails to state a claim, this argument cannot prevent dismissal. 23

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