Earlier this month, Apple and Intel filed their second amended complaint against Fortress Investment. It all started in October 2019 with an Intel antitrust lawsuit in the Northern District of California, which was effectively replaced with a joint Apple-Intel filing in November 2019.
The November 2019 filing was 57 pages long, but not specific enough to meet the pleading requirements in Judge Edward M. Chen's opinion. The complaint has meanwhile grown to 161 pages plus a 17-page table. In many other cases, this would suggest that additional claims have been added. Here, however, the complaint is actually more narrowly focused, and the prayers for relief are the same as in the original complaint except an additional request for "[a]n order directing the termination of the anticompetitive conduct and injunctive relief that restores competition to the markets at issue."
The fact that Qualcomm's Ninth Circuit victory over the FTC won't be appealed to the Supreme Court doesn't make things easier for Apple and Intel, but it makes Apple and Intel v. Fortress even more important: whether this case reaches the appeals court before or after trial, and regardless of who prevails in this case, it will present an opportunity for the Ninth Circuit to clarify that FTC v. Qualcomm doesn't immunize patent-related practices from antitrust liability to the far-reaching extent that some would have us all believe.
Even if--in a totally hypothetical but conceivable scenario--all that Apple and Intel achieved in the Fortress case was a trend reversal from FTC v. Qualcomm, that would be a strategic breakthrough in its own right.
There's also a patent policy dimension to this case. Most patent infringement cases are nowadays brought by non-practicing entities (NPEs) that are affiliated with such groups as Fortress Investment, Acacia, or IP Edge. In other words, there's a trend toward consolidation and economies of scale in the NPE business. This is the rhetorically strongest sentence in the second amended complaint that complains about the effect of such consolidation in light of litigation campaigns such as 25 Uniloc v. Apple and 35 Uniloc v. Google cases (including Google affiliates):
"Fortress and its [patent assertion entities] operate based on volume and repetition, targeting the resolve of the targets instead of establishing the merits and value of the patents."
A slightly longer version of the same allegation is also found in the complaint:
"Patent assertion thus becomes simply a numbers game disassociated from the merits of the underlying patents, with PAEs and their investors betting that serial assertions with aggressive demands will strike a jackpot eventually making up for many other losses."
The question before Judge Chen at this point is whether the pleading requirements for an antitrust case are met. It's not that Apple and Intel didn't state these types of allegations before, but broad assertions just weren't deemed sufficient to go forward with the case.
But long before this case goes to trial, or before an appeals court might hear a dismissal with prejudice, policy makers should pay attention to what Apple and Intel describe in their complaint. How much leverage, such as in the form of injunctive relief, do we as a society want to give patent owners who don't make products that compete with the ones they accuse of infringement? In the U.S., there are limits under eBay v. MercExchange, which some lawmakers on Capitol Hill would like to overturn. In Germany, NPEs have the same access to injunctive relief as all other patent holders (and the patent injunction reform that may be enacted in the coming months won't change that). Interestingly, the complaint notes that "VLSI is seeking to enjoin Intel in multiple litigations in China." That's the Fortress-funded company that recently won a $2.2 billion verdict against Intel in the Western District of Texas. Another VLSI v. Intel trial in the Western District of Texas--where many major technology companies get sued as I discussed in my previous post--will go to trial next month.
Apple and Intel also complain that "by controlling patents across several PAEs (including those with which Fortress’s relationship is not readily apparent), Fortress conceals the true scope of its patent portfolio." Transparency in patent ownership has been an issue for a long time and is by no means specific to Fortress. Less than ten years ago, even Google opposed transparency because it thought it had a bargaining chip against Apple, Microsoft and possibly others by threatening to sue them over patents it described as very powerful but declined to disclose.
Obtaining (through filings or acquisitions), licensing, and asserting patents are legitimate activities. As the complaint notes, "[t]here is nothing inherently illegal with owning many patents or obtaining those patents through acquisition." The problem in patent policy is that politicians often have the "lone inventor" in mind whom some reckless large corporations just don't want to pay. But those "lone inventors" bring very few patent infringement complaint compared to major aggregators. Apple and Intel's Fortress case draws attention to what happens when billions of dollars are invested in the acquisition and enforcement of patent portfolios.
There's one theory of harm underlying Apple and Intel#s complaint that Judge Chen is, in principle, prepared to entertain: the monopolization of specific licensing markets by the acquisition of patents covering techniques that could substitute for one another. However, Fortress has consistently complained that Apple and Intel failed to define such markets with sufficiently clear boundaries, and so far Judge Chen agreed and sent Apple and Intel back to the drawing board.
Apple and Intel have gone to extreme lengths, literally speaking, in order to complete their market definition homework. One of the markets they've defined is the "Generating Alerts Based on Blood Oxygen Level Patents Market." It may seem funny, but the reason I provided this example in the headline is simply that this shows how hard Apple and Intel are trying to meet the antitrust pleading standard.
The court also wants Apple and Intel to plead competitive harm in the form of excessive royalties having been obtained as a result of patent aggregation in certain markets. Here are a few passages that demonstrate Apple and Intel's efforts in that regard:
"[T]he success of this aggregation and its anticompetitive effects can be seen in the disparity between (1) the prices at which Fortress and [its affiliates] acquired substitute and complementary patents and/or valued such patents before aggregation and (2) the significantly higher amounts that Defendants have obtained as royalties or sought in damages for these same patents after they have been aggregated under Fortress’s control in the relevant patent markets."
"{T]he value to the prior owners of asserting the transferred patents was outweighed by the costs of doing so before aggregation because the value of the patents was constrained by competition in the markets for those patents and the owners lacked market power. The prior owners thus did not assert them. Likewise, the prior owners could not have obtained the licensing amounts for the aggregated patents that Defendants have obtained or seek without the benefit of eliminating competition through aggregation. If the prior owners had been able to obtain such supracompetitive royalties, they would not have sold their patents to Defendants for amounts far below what Defendants have obtained or seek in royalties, and instead either would have sought to license the transferred patents themselves or sold them to Defendants at far higher prices. Indeed, except for limited exceptions described below, the aggregated patents had not previously been offered to Apple or Intel to license, and thus, on information and belief, nor to other similarly-situated potential licensees. The prior owners thus were seeking no royalties for the aggregated patents before their sale."
"To the extent that Fortress and the other Defendants have patents that would actually be of value to potential licensees, the transfer of those patents to Fortress’s control limits access to them because those patents are now held by entities that, in light of the elimination of competition that constrained their prices, now have no incentive to license patents in a way that captures royalties that are commensurate with their actual value. Instead, those entities have incentives to obtain excessive monopoly rents by exploiting patent portfolios that aggregate substitute patents with many meritless patents."
Fortress and its affiliates will deny this. For example, I guess they will argue that prior owners simply didn't fully understand the value of those patents. But if Judge Chen or the appeals court finds that those arguments just go to the merits, then Apple and Intel will get their day--actually, a number of days--in court.
The deadline for Fortress and its affiliates to file an answer to the complaint or a renewed motion to dismiss (or similar motion) has been pushed back to April 26. In the event there will be another motion, the deadline for Apple and Intel's opposition is June 14 (in which case Fortress can reply by July 8).
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