Kimberly-Clark Worldwide Inc v. First Quality Products Inc et al

Filing 421

MEMORANDUM AND ORDER - AND NOW, this 17th day of May, 2011, upon con. of plf.'s mtn. to dismiss, & pursuant to the accompanying Memorandum, it is ordered that plf.'s mtn. to dismiss 270 is denied. 248 (See memo for complete details.) Signed by Honorable William W. Caldwell on 5/17/11. (am, )

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
KIMBERLY-CLARK WORLDWIDE, INC.,

:

Plaintiff

:

vs.

: CIVIL NO. 1:CV-09-1685

:
FIRST QUALITY BABY PRODUCTS, LLC,
FIRST QUALITY PRODUCTS, INC.,
:
FIRST QUALITY RETAIL SERVICES, LLC,
FIRST QUALITY HYGIENIC, INC.,
:
Defendants and
Counterclaim Plaintiffs
:
vs.

:

KIMBERLY-CLARK CORPORATION,
:
KIMBERLY-CLARK WORLDWIDE, INC.,
KIMBERLY-CLARK GLOBAL SALES, LLC,:
Counterclaim Defendants

MEMORANDUM
I.

Introduction
Presently before the court is plaintiff Kimberly-Clark Worldwide, Inc.’s

(“KC”) motion to dismiss defendants First Quality Baby Products, LLC, First Quality
Products, Inc., First Quality Retail Services, LLC, and First Quality Hygienic, Inc.’s
(collectively “First Quality”) counterclaims I-VII. For the following reasons, we will deny
the motion.

II.

Background
First Quality avers the following. First Quality and KC each manufacture

a line of absorbent hygiene products, such as infant diapers, training pants, and adult
incontinence products. (Countercl. ¶¶ 16-18, 22-25.) KC is the maker of the Huggies

brand of products, while First Quality manufacturers and sells “private label”, or store
brands, to retailers. (Countercl. ¶¶ 16, 22-25.) KC currently maintains a thirty-five
percent market share for disposable baby diapers and a seventy-five percent share in
the training pants markets. (Countercl. ¶ 17-18.)
As a result of these market shares and the amassing of over 300
patents, First Quality alleges that KC uses its patents to disrupt competitors and to
maintain a monopoly in the disposable baby diaper and training pants market.
(Countercl. ¶¶ 13, 93.) KC first threatens a patent lawsuit and then engages in sham
litigation to drain the resources of private label manufacturers, thereby reducing the
ability of private labelers to compete with KC’s larger market shares. (Countercl. ¶¶
84-87, 112-13.) It accomplishes this goal by enforcing patents that, according to First
Quality, KC knows to be invalid, procured through fraud on the Patent and Trademark
Office (“PTO”), or not infringed. (Countercl. ¶¶ 51-52, 84-86.) KC then misrepresents
the nature of the litigation in order to threaten retail outlets, such as Walmart, with
“empty shelves” of diapers if it does not make KC the exclusive supplier of training
pants store brand, or forces private label manufacturers to enter into secret settlement
agreements that involved the purchasing of unnecessary licences. (See Countercl. ¶¶
18, 112.) As a result, consumers are forced to pay more for disposable baby diapers
and training pants, and competitors efforts to enter and compete in the market are
hindered. (Countercl. ¶¶ 113-114.)
On February 12, 2010, KC submitted a motion seeking leave to file a
second amended complaint. KC’s proposed amendment included the same
allegations against all the defendants, but also sought to add a new defendant, First
Quality Hygienic, Inc., add allegations of inducement and/or contributory infringement
in Count I, add allegations of willful infringement to Counts III and IV, and finally

2

include additional allegedly infringing products under Counts VI, VII, VIII, and
X–Confidence Underwear and Extra Absorbency. We granted leave and the second
amended complaint was deemed filed on May 5 ,2010.
On July 26, 2010, First Quality filed an answer wherein in alleged
numerous additional facts that were not present in its original answer or its answer to
the amended complaint. In addition, First Quality alleged, for the first time, seven new
counterclaims. In response, KC filed motions to strike, dismiss, sever and transfer, or
in the alternative sever and stay defendants counterclaims I-VII. We granted KC’s
motion to strike the counterclaims, concluding that First Quality did not seek leave of
court before filing asserting its new claims. See Kimberly-Clark Worldwide, Inc. v. First
Quality Baby Prods., LLC, - - - F.Supp.2d - - - -, 2010 WL 5365650 (M.D. Pa. 2010).
However, on reconsideration, we vacated our order and denied KC’s motion to strike.
See Kimberly-Clark Worldwide, Inc. v. First Quality Baby Prods., LLC, No. CV-091685, 2011 WL 743468 (M.D. Pa. Feb. 24, 2011). On April 29, 2011, we granted KC’s
motion to bifurcate the patent claims and counterclaims I-VII for purposes of trial,
concluding judicial efficiency and jury comprehension necessitated claim separation.
Kimberly-Clark Worldwide, Inc. v. First Quality Baby Prods., LLC, No. CV-09-1685,
2011 WL 1627052, at *2 (M.D. Pa. April 29, 2011). We also stayed discovery related
to counterclaims I-VII until such time as we resolved the instant motion to dismiss. Id.
at *3.

III.

Discussion
A.

Standard of Review
Federal Rule of Civil Procedure 12(b)(6) authorizes dismissal of a

complaint for “failure to state a claim upon which relief can be granted.” Under Rule
3

12(b)(6), we must “accept all factual allegations as true, construe the complaint in the
light most favorable to the plaintiff, and determine whether, under any reasonable
reading of the complaint, the plaintiff may be entitled to relief.” Fowler v. UPMC
Shadyside, 578 F.3d 203, 210 (3d Cir. 2009) (quoting Phillips v. County of Allegheny,
515 F.3d 224, 231 (3d Cir. 2008)). While a complaint need only contain “a short and
plain statement of the claim,” Fed. R. Civ. P. 8(a)(2), and detailed factual allegations
are not required, Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955,
1964, 167 L.Ed.2d. 929 (2007), a complaint must plead “enough facts to state a claim
to relief that is plausible on its face.” Id. at 570, 127 S.Ct. 1955 at 1974. “The
plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than
a sheer possibility that a defendant has acted unlawfully.” Ashcroft v. Iqbal, - - - U.S. - - -, 129 S.Ct. 1937, 1949 (2009)(quoting Twombly, 550 U.S. at 556, 127 S.Ct. at
1965.) Instead, this requirement “calls for enough facts to raise a reasonable
expectation that discovery will reveal evidence of the necessary element.” West Penn
Allegheny Health Sys., Inc. v. UPMC, 627 F.3d 85, 98 (3d Cir. 2010)(citing Phillips,
515 F.3d at 234). “[L]abels and conclusions” are not enough, Twombly, 550 U.S. at
555, 127 S.Ct. at 1964-65, and a court “‘is not bound to accept as true a legal
conclusion couched as a factual allegation.’” Id., 127 S.Ct. at 1965 (quoted case
omitted).
In resolving the motion to dismiss, we thus “conduct a two-part analysis.”
Fowler, supra, 578 F.3d at 210. First, we separate the factual elements from the legal
elements and disregard the legal conclusions. Id. at 210-11. Second, we “determine
whether the facts alleged in the complaint are sufficient to show that the plaintiff has a
“‘plausible claim for relief.’” Id. at 211 (quoted case omitted). When evaluating
monopolization claims under the Sherman Act, we must “look to the [alleged]

4

monopolist’s conduct taken as a whole rather than considering each aspect in
isolation.” LePage’s Inc. v. 3M, 324 F.3d 141, 162 (3d Cir. 2003).
B.

Counts I and VI - Monopolization
First Quality asserts a monopolization claim against KC under section 2

of the Sherman Act, 15 U.S.C. § 2, and violation of New York’s Donnelly Act, N.Y.
General Business Law § 340.1 KC seeks dismissal of both claims for failure to state a
claim, arguing that: (1) First Quality failed to sufficiently allege anticompetitive conduct
in the relevant monopolized market; (2) First Quality inadequately alleges fraud or
sham litigation, thus rendering KC immune from antitrust liability; (3) First Quality’s
allegations of secret settlements and arbitrations do not show plausible
monopolization; and (4) First Quality failed to sufficiently plead that KC’s patent
enforcement actions were objectively baseless. (see doc. 271.)
The Sherman Act provides, in relevant part that “[e]very 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.” 15 U.S.C. § 2. To
that end, a monopolization claim has two elements: “(1) the possession of monopoly
power in the relevant market and (2) the 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, 86 S.Ct. 1698 (1966). However, the “mere possession of monopoly
1

New York’s Donnelly Act is a parallel antitrust statute to the Sherman Act. Thus, the
monopolization claims will be addressed together because the requirements under the
Donnelly Act are identical to a monopolization claim under the Sherman Act. See Benjamin of
Forest Hills Realty, Inc. v. Austin Sheppard Realty, Inc., 823 N.Y.S.2d 79, 81 (N.Y. App. Div.
2006)(“The Sherman Act (15 U.S.C. § 1) and the Donnelly Act require identical basic elements
of proof for claims of monopolization...and, in fact, the Donnelly Act was modeled on the
Sherman Act.).

5

power” alone is not unlawful; “it is an important element of the free-market system.”
Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP., 540 U.S. 398, 407,
124 S.Ct. 872 (2004). Nevertheless, the possession of monopoly power will be found
unlawful if “it is accompanied by an element of anticompetitive conduct.” See Id.
(emphasis in original). Anticompetitive conduct takes many forms, “but it is generally
defined as conduct to obtain or maintain monopoly power as a result of competition on
some basis other than the merits.” Broadcom Corp. v. Qualcomm, Inc., 501 F.3d 297,
308 (3d Cir. 2007); see Conwood Co., L.P. v. U.S. Tobacco Co., 290 F.3d 768, 783
(6th Cir. 2002)(“If a firm has been attempting to exclude rivals on some basis other
than efficiency, it is fair to characterize its behavior as [anticompetitive]”).2
This requirement of anticompetitive behavior is important in the context
of patents, because a patent by its nature grants a patentee the right to exclude
others. Thus, “a patent is an exception to the general rule against monopolies and to
the right of access to a free and open market.” In re Ciprofloxacin Hydrochloride
Antitrust Litig., 544 F.3d 1323, 1333 (Fed. Cir. 2008)(quoting Precision Instrument Mfg.
Co. v. Auto. Maint. Mach. Co., 324 U.S. 806, 816, 65 S.Ct. 993 (1945)).3

2

Monopoly power is defined as the “ability to control prices or exclude competition.”
United States v. Dentsply Int’l., Inc., 399 F.3d 181, 187 (3d Cir. 2005).
3

In determining whether conduct in procuring or enforcing a patent is sufficient to strip
a patentee of its immunity from federal antitrust laws, we apply the law of the Federal Circuit.
Honeywell Int’l Inc. v. Universal Avionics Sys. Corp., 488 F.3d 982, 1000-01 (Fed. Cir. 2007).
However, we apply Third Circuit law when approaching other antitrust issues. Id.

6

1. Anticompetitive Conduct
As mentioned previously, KC argues that First Quality failed to
sufficiently plead anticompetitive conduct tied to the relevant monopolized markets.4
While neither conceding nor denying that it holds monopoly power in this market, KC
claims that First Quality does not explain how KC’s enforcement of its patents with
respect to disposable diapers or incontinence products can somehow enhance or
protect KC’s position in the training pants market. (doc. 271, pg. 16.) First Quality
responds that KC intended to harm First Quality by attacking it across a range of
products in order to raise First Quality’s costs thereby preventing it from challenging
KC in the relevant market. (doc. 314, pg. 19.)
After review, First Quality’s sufficiently alleges that KC engaged in
anticompetitive conduct. KC excluded and suppressed competition. (Countercl. ¶¶
112-13). The alleged anticompetitive conduct included intentionally obtaining patents
through fraud on the patent office (Countercl. ¶¶ 35-83), product disparagement
through false claims (Countercl. ¶¶ 18, 33), secretly arbitrating patent disputes and
coercively acquiring licensing agreements through settlement. (Countercl. ¶¶ 13, 9299, 112.) Each of these acts in isolation may itself not rise to the level of
anticompetitive conduct, but in the aggregate it represents anticompetitive activity tied

4

First Quality avers that the relevant markets are disposable baby diaper and training
pants markets, (Countercl. ¶¶ 13, 111, & 113), and the relevant geographic location for said
markets is the United States, (Countercl. ¶ 14). As mentioned previously, KC allegedly
maintains a 35% and 75% market share in the disposable baby diaper and training pants
market, respectively. KC does not admit or deny that it holds monopoly power in the training
pants market. Furthermore, KC is correct in its assertion that a 35% market share alone is
insufficient to establish monopoly power. See Fineman v. Armstrong World Indust., Inc., 980
F.2d 171, 201 (3d Cir. 1992). However, this determination does not apply if “other relevant
factors” are present, such as the size and strength of competing companies, freedom of entry
into the market, pricing trends and practices in the industry, ability of consumers to substitute
to comparable goods, and consumer demand. Id. at 201-02 (citing Weiss v. York Hosp. 745
F.2d 786, 827 n.72 (3d Cir. 1984). For purposes of this motion, we conclude that First Quality
alleged sufficient facts showing these additional factors. Thus, we will assume that KC
maintains monopoly power in the above mentioned markets.

7

to the relevant markets that raise a plausible claim for relief. See Abbot Labs. v. Teva
Pharm. USA, Inc., 432 F.Supp.2d 408, 428 (D. Del. 2006)(“[A plaintiff is] entitled to
claim that individual acts are antitrust violations, as well as claiming that those acts as
a group have anticompetitive effect even if the acts taken separately do not.”).
2. Noerr-Pennington Immunity
KC next asserts it is shielded from antitrust liability by Noerr-Pennington
immunity. This doctrine, first expressed in Eastern Railroad Presidents Conference v.
Noerr Motor Freight, Inc., 365 U.S. 127, 81 S.Ct. 523 (1961) and later examined in
Mine Workers v. Pennington, 381 U.S. 657, 85 S.Ct. 1585 (1965), immunizes from
antitrust liability those who petition the government. Prosecuting a patent infringement
action is the type of activity protected by Noerr-Pennington.
Exceptions exist to this rule, generally referred to as the “sham” and
“Walker Process fraud” exceptions, which deny immunity to petitioning activities that
are mere “sham” and conduct before the PTO that is fraudulent, respectively. In re
Relafen Antitrust Litig., 346 F.Supp.2d 349, 358-59 (D. Mass. 2004); Nobelpharma AB
v. Implant Innovations, Inc., 141 F.3d 1059, 1068 (Fed. Cir. 1998). “[S]ham litigation is
present where the lawsuit is objectively baseless and subjectively motivated by a
desire to impose anticompetitive harm from the judicial process rather than obtain
judicial relief.” Erbe Elektromedizin GmbH v. Canady Tech. LLC, 629 F.3d 1278, 1291
(Fed. Cir. 2010)(citing Real Estate Investors, Inc. v. Columbia Pictures Indus., Inc.
(“PRE”), 508 U.S. 49, 60-61, 113 S.Ct. 1920 (1993)). In Walker Process Equipment ,
Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 86 S.Ct. 347 (1965), the
Supreme Court held that “the enforcement of a patent procured by fraud on the PTO
may be violative of § 2 of the Sherman Act.” Id. at 174. For Walker Process to apply,
a plaintiff must establish (1) a misrepresentation or omission, (2) intentionally done to
8

deceive the PTO, (3) which the patent office justifiably relied on, and (4) but for the
acts the patent would not have issued. In Re Relafen, 346 F.Supp.2d at 365 (citing
C.R. Bard, Inc. v. M3 Sys., Inc., 157 F.3d 1340, 1364 (Fed. Cir. 1998)); Nobelpharma,
141 F.3d at 1070-71. Walker Process fraud demands more than showing inequitable
conduct. Id. at 1070. It requires a higher threshold showing of both intent and
materiality, and the patentee must have been aware of the fraud when bringing the
suit. Id. at 1070, 1069-70. As explained by the Federal Circuit:
PRE and Walker Process provide alternative legal grounds
on which a patentee may be stripped of its immunity from
the antitrust laws; both legal theories may be applied to the
same conduct. Moreover, we need not find a way to merge
these decisions. Each provides its own basis for depriving a
patent owner of immunity from the antitrust laws; either or
both may be applicable to a particular party's conduct in
obtaining and enforcing a patent.
Id. at 1071. It therefore follows that if the elements of Walker Process can be met
antitrust liability “can be imposed without the additional sham inquiry required” for
sham litigation under PRE.
Here, First Quality’s allegations sufficiently allege a Walker Process
claim: KC deliberately and intentionally withheld material prior art in connection with
the prosecution of a patent-in-suit. (Countcl. ¶¶ 35-48.) The complaint specifically
describes the individuals who knew of the prior art’s existence, (Countercl. ¶¶ 41-46,
147, 154, 159-162, 168-170, 188), that the prior art was withheld during the patent
prosecution process (Countercl. ¶¶ 38, 41-48, 154, 163, 186, 188) from the PTO
(Countercl. ¶¶ 38, 41-48, 154, 163, 186, 188), and that the objective of failing to cite
this prior art was to deceive the PTO into issuing a patent. (Countercl. ¶¶ 35-41 186,
188.) Thus, as a result of KC’s conduct, the PTO issued a patent that is clearly invalid.
(Countercl. ¶ 35, 36, 40; doc. 314 at pg. 31.) The above allegations demonstrate that

9

First Quality has alleged enough facts showing a plausible Walker Process claim.
Therefore, this claim may be used to support First Quality’s antitrust allegations.
Based on the preceding, we conclude that First Quality has sufficiently
alleged a monopolization claim under the Sherman and Donnelly Acts. Thus, we will
deny KC’s motion to dismiss these claims.5
C.

Counts II, III, and V-VII
Instead of challenging the allegations of each the additional

counterclaims, KC simply raises two arguments in support of its claim that the
remaining counterclaims should be dismissed: (1) First Quality failed to sufficiently
plead bad faith and (2) false statements. (See doc. 271 at pgs. 33 & 35, respectively.)
These arguments are based on KC’s contention that First Quality insufficiently pled
claims for sham litigation and Walker Process. As discussed in the preceding, we
concluded that First Quality has sufficiently alleged said claims. Thus, KC’s arguments
are mooted by this finding because we concluded that First Quality sufficiently pled
numerous acts of potential bad faith related to the antitrust claims. In addition, First
Quality has alleged that KC claimed that certain products were covered by patents that
it knew to be invalid, unenforceable and fraudulently obtained (Countercl. ¶¶ 32-34,
88-91), that its products were covered by certain patents when they were not
(Countercl. ¶¶ 118-124), that First Quality was incapable of supplying non-infringing
products (Countercl. ¶¶ 129-131), and that KC knowingly and intentionally interfered
with First Quality’s contractual relationships (Countercl. ¶¶ 123-136.) These
allegations, in conjunction with the aforementioned averments under the antitrust
claims, sufficiently plead that KC intentionally made false statements or
5
At this time, the allegations also show a plausible sham litigation claim. However,
nothing in our analysis precludes KC from reasserting its immunity claim at the close of
discovery in a motion for summary judgment.

10

misrepresentations to disparage and harm the business interests of First Quality.
Thus, we will deny KC’s motion to dismiss the counterclaims.
We will issue an appropriate order.

/s/William W. Caldwell
William W. Caldwell
United States District Judge
Date: May 17, 2011

11

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
KIMBERLY-CLARK WORLDWIDE, INC.,

:

Plaintiff

:

vs.

: CIVIL NO. 1:CV-09-1685

:
FIRST QUALITY BABY PRODUCTS, LLC,
FIRST QUALITY PRODUCTS, INC.,
:
FIRST QUALITY RETAIL SERVICES, LLC,
FIRST QUALITY HYGIENIC, INC.,
:
Defendants and
Counterclaim Plaintiffs
:
vs.

:

KIMBERLY-CLARK CORPORATION,
:
KIMBERLY-CLARK WORLDWIDE, INC.,
KIMBERLY-CLARK GLOBAL SALES, LLC,:
Counterclaim Defendants

ORDER
AND NOW, this 17th day of May, 2011, upon consideration of plaintiff’s
motion to dismiss, and pursuant to the accompanying Memorandum, it is ordered that
plaintiff’s motion to dismiss (doc. 270) is denied.

/s/William W. Caldwell
William W. Caldwell
United States District Judge