ChriMar Systems Inc. et al v. Cisco Systems Inc. et al

Filing 240

ORDER REGARDING MOTION FOR JUDGMENT ON THE PLEADINGS. Signed by Judge JEFFREY S. WHITE on 10/29/14. (jjoS, COURT STAFF) (Filed on 10/29/2014)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA
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CHRIMAR SYSTEMS, INC, et al.,

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For the Northern District of California

United States District Court

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Plaintiffs,

No. C 13-01300 JSW

v.

ORDER REGARDING MOTION
FOR JUDGMENT ON THE
PLEADINGS

CISCO SYSTEMS, INC, et al.,
Defendants.
/

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Now before the Court is the motion by Plaintiff ChriMar Systems Inc. d/b/a/ CMS

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Technologies and ChriMar Holding Company, LLC (collectively, “ChriMar”) for judgment on

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the pleadings regarding the antitrust counterclaims filed by Defendants Cisco Systems, Inc. and

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Linksys LLC (together, “Cisco”) and by Defendant Hewlett-Packard Company (“HP”)

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(collectively, “Defendants”). Having considered the parties’ pleadings and relevant legal

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authority, the Court hereby grants ChriMar’s motion.

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BACKGROUND
On October 31, 2011, ChriMar filed this patent infringement action against Defendants,

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accusing them of infringing United States Patent No. 7,457,250 (“’250 Patent”). Cisco filed

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counterclaims on January 6, 2012 and amended its counterclaims on December 26, 2012. HP

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filed counterclaims on December 26, 2012.

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In their counterclaims, Defendants allege that the Institute of Electrical and Electronics

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Engineers (“IEEE”) is a standard setting organization and that it amended the 802.3 standard

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with the 802.3af and 802.3at standards. (Cisco’s First Amended Counterclaims (“FAC”), ¶¶ 19-

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21; HP’s Counterclaims, ¶¶ 18-20.) The IEEE has a “‘patent disclosure policy’ that requires

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participants in the standards setting process to disclose patents or patent applications they

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believe to be infringed by the practice of the proposed standard.” (Cisco FAC, ¶ 21; HP

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Counterclaims, ¶ 21.) The disclosure policy further requires those who disclose intellectual

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property rights to provide a letter of assurance stating whether they would enforce any of their

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present or future patent(s) whose use would be required to implement the proposed IEEE

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standard or provide a license to applicants without compensation or under reasonable rates, with

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reasonable terms and conditions that are demonstrably free of any unfair discrimination

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(“RAND” terms). (Id.) Defendants allege that ChriMar was required to but failed to disclose to
the IEEE its belief that its ’250 Patent was essential to the proposed 802.3af and/or the 802.3at

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For the Northern District of California

United States District Court

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amendments to the 802.3 standard and that ChriMar was not willing to license the ’250 Patent

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on RAND terms. (Cisco FAC, ¶ 25; HP Counterclaims, ¶ 24.)

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Defendants further allege that “ChriMar’s failure to disclose the ’250 Patent was done

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knowingly and with intent to deceive and induce the IEEE and participants in the standards-

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setting process” for the amendments to the IEEE 802.3af and 802.3at standards. (Cisco FAC, ¶

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31; HP Counterclaims, ¶ 30.) “Due in part to ChriMar’s knowing and intentional deception, the

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industry adopted the present form of the IEEE 802.3af and IEEE 802.3at amendments to the

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IEEE 802.3 standard, and is now locked-in to the current implementation . . . for Power over

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Ethernet-enabled products.” (Cisco FAC, ¶ 32; HP Counterclaims, ¶ 31.) According to

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Defendants, if ChriMar had properly disclosed to the IEEE its belief that the ’250 Patent “would

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be infringed by practicing the 802.3af and 802.3at amendments to the 802.3 standard, and

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that ChriMar was unwilling to license the patent on RAND terms, the IEEE would have (a)

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incorporated one or more viable alternative technologies into the IEEE 802.3af and IEEE

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802.3at amendments to the IEEE 802.3 standard; (b) required ChriMar to provide a letter of

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assurance that it would license the ’250 Patent on RAND terms; (c) decided to either not adopt

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any amendment to the IEEE 802.3; and/or (d) adopted an amendment that did not incorporate

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technology that ChriMar claims is covered by the ’250 Patent.” (Cisco FAC, ¶ 36; HP

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Counterclaims, ¶ 35.)
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Defendants allege that ChriMar has taken the position that all Power over Ethernet-

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enabled products infringe the ’250 Patent. To the extent that the ’250 Patent is essential to the

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802.3af and the 802.3at standards, no viable technology substitutes exist and ChriMar has

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monopoly power over the Power over Ethernet Technology Market. (Cisco FAC, ¶ 64; HP

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Counterclaims, ¶ 60.)

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Defendants allege that Plaintiffs violated Section 2 of the Sherman Act by abusing

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monopoly power. HP also brings a claim for attempted monopolization. Defendants both bring

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claims under California’s Unfair Competition Law, California Business Code § 17200 (“UCL”)

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based on their monopolization claims.

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For the Northern District of California

United States District Court

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ANALYSIS
A.

Applicable Legal Standards.

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A motion for judgment on the pleadings pursuant to Federal Rule of Civil Procedure

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12(c) challenges the legal sufficiency of the claims asserted in the complaint. A Rule 12(c)

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motion is “functionally identical” to a motion to dismiss pursuant to Federal Rule of Civil

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Procedure 12(b)(6). Ross v. U.S. Bank Nat’l Ass’n, 542 F. Supp. 2d 1014, 1023 (N.D. Cal

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2008). “For purposes of the motion, the allegations of the non-moving party must be accepted

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as true . . . Judgment on the pleadings is proper when the moving party clearly establishes on

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the face of the pleadings that no material issue of fact remains to be resolved and that it is

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entitled to judgment as a matter of law.” Hal Roach Studios, Inc. v. Richard Feiner and Co.,

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Inc., 896 F.2d 1542, 1550 (9th Cir. 1990). However, “[t]he court need not . . . accept as true

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allegations that contradict matters properly subject to judicial notice . . . .” Sprewell v. Golden

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State Warriors, 266 F. 3d 979, 988 (9th Cir. 2001).

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Where a plaintiff alleges fraud, Federal Rule of Civil Procedure 9(b) (“Rule 9(b)”)

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requires the plaintiff to state with particularity the circumstances constituting fraud, including

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the “who, what, when, where, and how” of the charged misconduct. See Vess v. Ciba Geigy

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Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003); In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541,

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1547-49 (9th Cir. 1994). However, Rule 9(b) particularity requirements must be read in

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harmony with Federal Rule of Civil Procedure 8’s requirement of a “short and plain” statement
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of the claim. Thus, the particularity requirement is satisfied if the complaint “identifies the

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circumstances constituting fraud so that a defendant can prepare an adequate answer from the

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allegations.” Moore v. Kayport Package Exp., Inc., 885 F.2d 531, 540 (9th Cir. 1989); see also

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Vess, 317 F.3d at 1106 (“Rule 9(b) demands that, when averments of fraud are made, the

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circumstances constituting the alleged fraud be specific enough to give defendants notice of the

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particular misconduct ... so that they can defend against the charge and not just deny that they

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have done anything wrong.”) (internal quotation marks and citations omitted).

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B.

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1.

Defendants’ Monopolization Counterclaims.

ChriMar moves to dismiss Defendants’ counterclaims for monopolization on the

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For the Northern District of California

United States District Court

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ChriMar’s Motion.

grounds that Defendants failed to sufficiently allege the relevant market, ChriMar’s market

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share in pleading monopoly power, or any causal antitrust injuries. “A claim of monopolization

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under [Section] 2 of the Sherman Act has two elements: (1) the possession of monopoly power

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in the relevant market; and (2) the willful acquisition or maintenance of that power as

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distinguished from growth or development as a consequence of a superior product, business

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acumen, or historic accident.” In re eBay Seller Antitrust Litig., 545 F. Supp. 2d 1027, 1031

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(N.D. Cal. 2008) (citing, inter alia, U.S. v. Grinnell Corp., 384 U.S. 563, 570 (1966)). In

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addition, a plaintiff must allege facts to show “an injury caused by the violation.” Id. (citing

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Sicor Ltd. v. Cetus Corp., 51 F.3d 848, 855 (9th Cir. 1995); P. Express, Inc. v. United Airlines,

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Inc., 959 F.2d 814, 817 (9th Cir. 1992).

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a.

Relevant Product Market.

A relevant product market usually is defined as “the pool of goods or services that enjoy

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reasonable interchangeability of use and cross-elasticity of demand.” Tanaka v. University of

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So. Cal., 252 F.3d 1059, 1063 (9th Cir. 2001); see also W. Parcel Exp. v. United Parcel Serv. of

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America, Inc., 65 F. Supp. 2d 1052, 1058 (N.D. Cal. 1998). A court may grant a motion to

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dismiss if a “‘plaintiff fails to define [the] proposed relevant market with reference to the rule of

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reasonable interchangeability and cross-elasticity of demand, or alleges a proposed relevant

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market that clearly does not encompass all interchangeable substitute products....’” In re eBay
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Pizza Inc., 124 F.3d 430, 436 (3rd Cir. 1997); see also Newcal Indus. Inc. v. Ikon Office

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Solutions, Inc., 513 F.3d 1038, 1045 (9th Cir. 2008) (citing Queen City Pizza, 124 F.3d at 436-

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37) (court may dismiss where relevant market is “facially unsustainable”). However, because

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“the validity of the ‘relevant market’ is typically a factual element rather than a legal element,

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alleged markets may survive scrutiny under Rule 12(b)(6) subject to factual testing by summary

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judgment or trial.” Newcal, 513 F.3d at 1044 (citing High Technology Careers v. San Jose

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Mercury News, 996 F.2d 987, 990 (9th Cir. 1993) (holding that the market definition depends

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on a “factual inquiry into the ‘commercial realities’ faced by consumers”) (quotations omitted)).

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However, a complaint may be dismissed pursuant to Rule 12(b)(6) “if the complaint’s ‘relevant

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Seller Antitrust Litig., 545 F. Supp. 2d at 1031 (quoting Queen City Pizza, Inc. v. Domino’s

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United States District Court

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market’ definition is facially unsustainable.” Id. (citing Queen City Pizza, 124 F.3d at 436-37).

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The relevant market includes both a product market and a geographic market. See Newcal, 513

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F.3d at 1045 n. 4. ChriMar does not argue that Defendants fail to allege sufficient facts to

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define the relevant geographic market.

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Courts typically require that the proposed relevant market be defined with reference to

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the rule of reasonable interchangeability and cross-elasticity of demand. However, in the

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context of a standard setting organization (“SSO”) locking in a standard which eliminates

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substitute or alternative technologies, courts have allowed a relevant market to be defined by

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the technologies that were competing before the standard was adopted to perform the function

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that is covered by the standard and the essential patent. For example, in Apple Inc. v. Samsung

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Electronics Co., Ltd., 2012 WL 1672493, *5 (N.D. Cal. May 14, 2012), the court found

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sufficient Apple’s allegations that defined the relevant market as “the various markets for

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technologies that – before the standard was implemented – were competing to perform each of

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the various functions covered by each of Samsung’s purported essential patents for” the

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standard. Moreover, the court noted that Apple alleged that pre-standardization there were

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alternative substitutes for the technologies covered by Samsung’s patents, and that after the

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SSO adopted the proposed standard, viable alternative technologies were excluded. Id.; see

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also Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 315 (3d Cir. 2007) (accepting as
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sufficient allegations that defined the relevant market as the market for the defendant’s

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proprietary technology that is essential to implement the standard, noting that the technology

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was not interchangeable with or substitutable for other technology due to the standard).

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Defendants argue that they defined the market as comprising the technologies that

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competed to perform the functions in the Power over Ethernet standards allegedly covered by

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the ’250 Patent. But their counterclaims do not actually contain such allegations. (See Cisco

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FAC, ¶ 60; HP Counterclaims, ¶ 56.) Accordingly, the Court finds that Defendants fail to

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sufficiently allege the relevant market.

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Market Share.

Defendants argue that their allegations regarding ChriMar’s failure to disclose its belief

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United States District Court

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b.

that the ’250 Patent was essential to the 802.3af and 802.3at amendments to the IEEE 802.3

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standard to the standard setting organization (“SSO”) is sufficient to allege their monopoly

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claims. According to Defendants, it is sufficient to allege that if the ’250 Patent is essential,

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then ChriMar has monopoly power. However, the authority they cite does not support their

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position.

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Defendants rely on Apple Inc. v. Samsung Electronics Co., Ltd., 2011 WL 4948567

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(N.D. Cal. Oct. 18, 2011). However, in that case, the court determined that Apple had

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sufficiently alleged monopoly power. Id., 2011 WL 4948567 at *4 fn. 4; see also Actividentity

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Corp. v. Intercede Group PLC, 2009 WL 8674284, *4 (N.D. Cal. Sept. 11, 2009) (finding

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allegations that the party had approximately 90% of the market were sufficient to allege

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monopoly power). The court in Samsung further noted that, in contrast to the theory that a

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patent holder misrepresented to a SSO that it would license its intellectual property on RAND

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terms, “[c]ourts have been more reluctant to find an antitrust violation based on the theory that a

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failure to disclose intellectual property rights in a declared essential patent created monopoly

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power for a member of the SSO.” Id., 2011 WL 4948567 at *5 (citing Rambus Inc. V. FTC, 522

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F.3d 456 (D.C. Cir. 2008) and Townsend v. Rockwell Intl. Corp., 2000 WL 433505 (N.D. Cal.

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March 28, 2000)). In order to allege market power, the Samsung court required the plaintiff to

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allege that “there was an alternative technology that the SSO was considering during the
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known of the patent holder’s intellectual property rights.” Id.; see also Actividentity, 2009 WL

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8674284, *3 (a monopolization claim based on failure to disclose to an SSO must allege, inter

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alia, “but for the failure to disclose, the SSO would have developed a different standard.”) The

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Samsung court also made clear that the heightened pleading requirements under Rule 9(b) for

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fraud applies to Defendants’ type of antitrust claim. Id., 2011 WL 4948567 at *6. Upon review

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of Defendants’ counterclaims, the Court finds that they fail to allege non-conclusory facts

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which, if true, would be enough to show that ChriMar acquired sufficient monopoly power.

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Notably, Defendants fail to clearly allege that the IEEE would have adopted an alternative

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standard had it known about the ’250 Patent and ChriMar’s position with respect to its ’250

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standard setting process and that the SSO would have adopted an alternative standard had it

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United States District Court

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Patent. Therefore, the Court finds that Defendants fail to sufficiently allege market power.

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c.

Antitrust Injury.

The Ninth Circuit has identified “four requirements for antitrust injury: (1) unlawful

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conduct, (2) causing an injury to the plaintiff, (3) that flows from that which makes the conduct

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unlawful, and (4) that is of the type the antitrust laws were intended to prevent.” American Ad.

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Mgmt., Inc. v. General Tel. Co., 190 F.3d 1051, 1055 (9th Cir. 1999). Defendants merely

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allege, in a conclusory fashion, that ChriMar’s alleged conduct “has caused and will directly

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and proximately cause antitrust liability to [Defendants] within the Power over Ethernet

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Technology Market . . .” (Cisco FAC, ¶ 66; HP Counterclaims, ¶ 62.) Defendants fail to allege

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any facts which, if true, would demonstrate an antitrust injury. Accordingly, based on their

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failure to sufficiently allege the relevant market, monopoly power, or any antitrust injury, the

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Court finds that Defendants have not alleged sufficient facts to state a counterclaim for

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monopolization. However, the Court will provide Defendants with leave to amend.

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2.

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ChriMar also moves to dismiss HP’s attempted monopolization claim on the grounds

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that HP failed to plead specific intent to monopolize or a dangerous probability of obtaining

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monopoly power. In order to state a claim for attempted monopolization, a plaintiff must allege

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the following elements: “(1) a specific intent to control prices or destroy competition; (2)

HP’s Attempted Monopolization Counterclaim.

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probability of achieving ‘monopoly power,’ and (4) causal antitrust injury.” Rebel Oil Co. v.

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Atlantic Richfield, Co., 51 F.3d 1421, 1434 (9th Cir. 1995). As discussed above, HP fails to

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sufficiently allege a causal antitrust injury and the relevant market. Due to these defects, HP

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fails to allege sufficient facts to state a counterclaim for attempted monopolization. In addition,

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although a lower percentage is required for an attempted monopoly claim, as opposed to an

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actual monopoly claim, HP must still allege sufficient market power. See Rebel Oil, 51 F.3d at

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1438 (“When the claim involves attempted monopolization, most cases hold that a market share

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of 30 percent is presumptively insufficient to establish the power to control price.”). Therefore,

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HP’s failure to sufficiently allege market power is fatal to its attempted monopolization claim as

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predatory or anticompetitive conduct directed at accomplishing that purpose; (3) a dangerous

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United States District Court

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well.

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ChriMar further argues that HP’s attempted monopolization counterclaim fails for the

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additional reason that HP fails to allege specific intent to monopolize or a dangerous probability

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of obtaining monopoly power because HP’s attempted monopolization allegations are based

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solely around the terminated International Trade Commission (“ITC”) investigation. However,

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upon review of HP’s counterclaims, the Court finds that HP does not rely solely upon the ITC

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investigation. HP’s counterclaim for attempted monopolization is also premised upon

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ChriMar’s alleged misconduct before the SSO. As noted above, the Court is providing

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Defendants with leave to amend their allegations regarding ChriMar’s purported misconduct

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before the SSO and the alleged anti-competitive effect of such conduct. Accordingly, the Court

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need not determine at this point whether HP’s additional allegations regarding the ITC

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investigation would be sufficient, standing alone, to state a claim for attempted monopolization

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if HP sufficiently alleges the relevant market, market power, and an antitrust injury. The Court

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dismisses HP’s counterclaim for attempted monopolization but is providing leave to amend.

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3.

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ChriMar moves to dismiss Defendants’ counterclaims to the extent they are premised

Defendants’ UCL Counterclaims.

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upon unfair and unlawful prongs of California UCL because they are premised on the same

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alleged conduct as their monopolization and attempted monopolization counterclaims. Courts
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have held that where the alleged conduct does not violate the antitrust laws, a claim based on

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unfair conduct under the UCL cannot survive. See DocMagic, Inc. v. Ellie Mae, Inc., 745 F.

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Supp. 2d 1119, 1147 (N.D. Cal. 2010) (finding that because the plaintiff failed to allege facts

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showing that the defendant’s conduct violated the Sherman Act, any claims the plaintiff “might

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be asserting under the UCL’s unfair prong necessarily fail as well.” (emphasis added)); Chavez

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v. Whirlpool Corp., 93 Cal. App. 4th 363, 375 (2001) (“If the same conduct is alleged to be both

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an antitrust violation and an ‘unfair’ business act or practice for the same reason – because it

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unreasonably restrains competition and harms consumers – the determination that the conduct is

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not an unreasonable restraint of trade necessarily implies that the conduct is not ‘unfair’ toward
consumers.”); Live Universe, Inc. v. MySpace, Inc., 304 Fed. Appx. 554, 557 (9th Cir. 2008)

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(same). Because the Court finds that Defendants have not alleged facts sufficient to state a

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counterclaim for monopolization or attempted monopolization, Defendants’ UCL

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counterclaims, to the extent they are premised on the unfair prong, fail as well.

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Moreover because Defendants fail to allege that ChriMar violated the Sherman Act, and

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thus engaged in unlawful conduct, they fail to state a claim under the UCL. See Berryman v.

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Merit Property Mgmt., Inc., 152 Cal. App 4th 1544, 1554 (2007) (“a violation of another law is

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a predicate for stating a cause of action” under unlawful prong). Accordingly, the Court

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dismisses Defendants’ UCL counterclaims to the extent they are premised upon the unfair and

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unlawful prongs. However, because the Court is providing Defendants with leave to amend

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their counterclaims under the Sherman Act, the Court will provide Defendants with leave to

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amend their UCL counterclaims as well.

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CONCLUSION
For the foregoing reasons, the Court GRANTS ChriMar’s motion for judgment on the

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pleadings and dismisses Defendants’ monopolization counterclaim, HP’s attempted

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monopolization counterclaim, and Defendants’ UCL counterclaim to the extent they are

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premised upon the unlawful and unfair prongs. However, the Court is providing Defendants

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with leave to amend. Defendants may file amended counterclaims in accordance with this

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Order by no later than December 1, 2014. If Defendants fail to file an amended complaint by

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December 1, 2014, the Court will dismiss these counterclaims with prejudice.

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IT IS SO ORDERED.

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Dated: October 29, 2014
JEFFREY S. WHITE
UNITED STATES DISTRICT JUDGE

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