The Fifth Circuit has ordered the dismissal of a lawsuit filed by automotive component supplier Continental against Internet of Things (IoT) licensing platform Avanci, LLC and several licensing partners. On February 28, the court determined that the plaintiff was not an "intended beneficiary" of the Avanci patent owners' contractual commitments to license their standard essential patents (SEPs) on fair, reasonable, and nondiscriminatory (FRAND) terms. As a result, the Fifth Circuit ruled that the company had not suffered a sufficient injury from the defendants' refusal to grant it a license, which in turn deprived it of Article III standing.
Continental filed the litigation below in May 2019 in the Northern District of California, naming Avanci and several patent owners participating in its licensing program as defendants: Conversant Intellectual Property Management, Inc. subsidiary Conversant Wireless Licensing S.à.r.l. (f/k/a Core Wireless Licensing S.a.r.l.), Nokia, and three subsidiaries of PanOptis Holdings, LLC (Optis Cellular Technology LLC; Optis Wireless Technology, LLC; and PanOptis Patent Management, LLC), subsequently adding Sharp via an amended complaint. The complaint detailed Continental's position in the automotive supply chain: the company is a "Tier 1" supplier of telematics control units (TCUs) that enable core vehicle features such as "GPS, interface software, and control functions" and that also include cellular connectivity. As further noted in the complaint, those TCUs incorporate network access devices (NADs) that Continental mainly sources from "Tier 2" suppliers, which in turn acquire the baseband processor chipsets needed to enable cellular connectivity from "Tier 3" suppliers such as Intel, MediaTek, or Qualcomm.
Continental's complaint alleged that it had been unsuccessful in its attempts to obtain a license to the defendants' patents, either from the defendants individually or from Avanci as the licensing platform manager, and asserted that they "collusively agreed to only offer licenses to the automotive industry at the OEM level"—i.e., to offer licenses only to automakers for finished vehicles—"in an attempt to obtain elevated royalties that far exceed any measure of FRAND". Through that conduct, alleged Continental, the defendants committed various antitrust violations and breached their commitments to the relevant standard-setting organization (SSOs) that they would license their SEPs on FRAND terms. The complaint further sought equitable relief.
The District Court's Decision: Continental Had Article III Standing but not Antitrust Standing
In August 2020, the defendants moved to dismiss the complaint on various grounds, asserting in part that Continental lacked standing under Article III because it never sought a license, rendering its "allegations of injury . . . too speculative"; that it had failed to state a claim as to antitrust and promissory estoppel; that the court lacked personal jurisdiction over Nokia, Conversant, and Avanci; and that the plaintiff had not properly served Sharp. That December, prior to ruling on the motion to dismiss, District Judge Lucy H. Koh granted the defendants' motion to transfer the case to the Northern District of Texas on convenience grounds (3:19-cv-02933). In that order, Judge Koh declined to resolve the jurisdictional issues raised in the pending motion to dismiss (Article III standing, personal jurisdiction, and improper service), citing in part the complexity of their resolution.
The defendants then filed an amended version of their motion to dismiss in the Texas action, updated to reflect Fifth Circuit law, which District Judge Barbara M.G. Lynn granted in September 2020. The court's analysis began with the issue of Article III standing—which requires an "injury in fact", that the injury be sufficiently linked to the defendant's conduct, and that the court's decision would resolve the injury—and the related issue of ripeness. Here, the court noted that the parties disputed whether the plaintiff has suffered an injury in fact and whether this action is ripe, observing that these issues "often intersect because the question of whether a plaintiff has suffered an adequate harm is integral to both". Judge Lynn held that while Continental had not sufficiently pleaded an injury in fact with respect to the potential that it might be required to indemnify OEMs, it had pleaded such an injury "based on its alleged inability to obtain from Defendants, on FRAND terms, SEP licenses needed for its TCUs". As a result, Judge Lynn declined to dismiss the case for lack of Article III standing and ripeness.
After declining to dismiss the case for lack of subject matter jurisdiction under the Foreign Trade Antitrust Improvement Act (FTAIA), Judge Lynn next addressed whether Continental had standing to sue under antitrust law. While Judge Lynn found that the plaintiff had suffered an injury in fact for similar reasons that it did under Article III, she found that the company had not suffered an antitrust injury. Rather, the court found that Continental's cited injury—its inability to obtain a FRAND license—"does not harm its competitive position or its position as a consumer of products used in its devices". The reason, explained the court, is that Continental may still produce TCUs for OEMs because the OEMs are still being licensed, according to the company's own allegations. While OEMs might be able to claim an antitrust injury should they be charged non-FRAND rates, the court found that Continental had not shown that those increased prices would be passed onto it.
Moreover, the court held that "[d]ownstream anticompetitive conduct that adversely affects a relationship with an upstream entity rarely results in an antitrust injury for the upstream entity" and noted that Continental and the OEMs occupy "distinct" places in the automotive supply chain: "Plaintiff builds the TCUs that then go downstream to the OEMs, which install the TCUs in vehicles they manufacture", characterizing these as "separate operations". Citing the Ninth Circuit's August decision in FTC v. Qualcomm, the court then held that "[t]he anticompetitive conduct allegedly directed at the downstream OEMs does not create an antitrust injury for the upstream TCU suppliers, like Plaintiff"—meaning that Continental has not suffered an antitrust injury, and therefore lacks antitrust standing. Additionally, the court held that even if had pleaded a sufficient antitrust injury, Continental would still have lacked antitrust standing because it had not shown that it was the best plaintiff to bring the action (which, per the court, would have been an OEM).
Judge Lynn further ruled that even if Continental had antitrust standing, it had not adequately established that the defendants' conduct amounted to the unlawful restraint of trade under Section 1 of the Sherman Act, nor had it shown unlawful monopolization or a conspiracy to monopolize under Section 2.
Having thus dismissed all of Continental's federal question claims, Judge Lynn declined to exercise supplemental jurisdiction over its "remaining declaratory judgment, breach of contract, promissory estoppel, and unfair competition claims" and dismissed the complaint.
The Fifth Circuit's Ruling on Appeal: Continental Had Neither Antitrust nor Article III Standing
In its February 28 decision on appeal, the Fifth Circuit focused its legal analysis on the issue of Continental's Article III standing. The court first addressed the company's theory that it had suffered an injury through the possibility that OEMs would take non-FRAND licenses and pass those costs onto Continental through indemnity agreements—agreeing with Judge Lynn that this was insufficient to establish Article III standing because it is "not . . . actual or imminent". The Fifth Circuit further held that "this alleged injury is 'doubly speculative': Continental would not be harmed unless OEMs first accepted non-FRAND licenses and then invoked their indemnification rights against Continental. Here, the pleadings do not establish that OEMs have accepted such licenses and invoked such rights". The court found that the supporting evidence offered by Continental to support these allegations "at most demonstrate that OEMs may seek to have Continental offset costs associated with licensing", and that they do not reflect an obligation to indemnify OEMs for non-FRAND royalties.
However, the Fifth Circuit departed from the district court as to Continental's second theory, which alleged an injury by virtue of the defendants' alleged refusal to offer it a FRAND license. As recounted above, Judge Lynn concluded that this was sufficient to convey Article III standing, ruling that "[t]he denial of property to which a plaintiff is entitled causes injury in fact". The Fifth Circuit, in contrast, found that Continental was differently situated from other manufacturers of standard-conforming products found by other circuit courts to be "third-party beneficiaries under FRAND contracts between SSOs and SEP holders". Unlike Microsoft, which the Ninth Circuit found to be a third-party beneficiary in its 2012 Microsoft v. Motorola decision, the court noted that Continental was not a member of the SSOs to which the patent owners had made their FRAND commitments. Additionally, whereas the Third Circuit found Broadcom to be a beneficiary of SEP holder Qualcomm's FRAND commitments as a "direct competitor of . . . Qualcomm that needed its SEP licenses to operate" (in Broadcom v. Qualcomm (2007)), the Fifth Circuit here distinguished Continental because "crucially, it does not need SEP licenses from Defendants-Appellees to operate". Noting that Avanci and the patent owner defendants only license OEMs, the court found no evidence "that Patent-Holder Defendants and SSOs intended to require redundant licensing of third parties up the chain, which is unnecessary to effectuate the purpose of the FRAND commitments and reduce patent hold-up".
As a result, the Fifth Circuit found that "Continental does not appear to be an intended beneficiary contractually entitled to a license on FRAND terms. And as an incidental beneficiary, it would have no right to enforce the FRAND contracts between the Patent-Holder Defendants and the SSOs".
Moreover, the appellate court found that even if Continental were an intended beneficiary, it had "suffered no cognizable injury" because the patent owners had satisfied their FRAND commitment with respect to Continental:
The supplier acknowledges that Avanci and Patent-Holder Defendants are "actively licensing the SEPs to the OEMs[,]' which means that they are making SEP licenses available to Continental on FRAND terms" As it does not need to personally own SEP licenses to operate its business, it has not been denied property to which it was entitled. And absent a "denial of property to which a plaintiff is entitled," Continental did not suffer an injury in fact.
Under the relevant circumstances, the Fifth Circuit observed that it would be "easier" for OEMs to establish an injury-in-fact if the defendants were to sue them for infringement or threaten do to so, and for SSOs to establish an injury if the defendants breached their FRAND contracts by imposing non-FRAND rates. "But these are not Plaintiffs-Appellants we have before us".
The court then concluded by vacating and remanding with instructions to dismiss for lack of Article III standing, declining to reach the issues of antitrust standing and the merits.
US Government Distances Itself from Appeal as Stakeholders Consider Draft of Revamped SEP Policy
A variety of stakeholders filed amicus briefs in the Fifth Circuit appeal, but the US government was not among them—an absence notable due to the involvement of the US Department of Justice (DOJ), under prior leadership, in the district court case.
Under Assistant Attorney General Makan Delrahim, the DOJ's Antitrust Division advocated for several policy changes generally favoring patent owners, arguing that SEP disputes are best resolved under contract law instead of antitrust, placing more emphasis on implementer hold-out rather than patent owner hold-up, and pushing for the availability of injunctive relief in SEP cases. Delrahim dubbed this set of policy principles the "New Madison" approach. The Delrahim Antitrust Division advocated for these policies through several channels, including the filing of amicus briefs in SEP disputes.
This included the Continental v. Avanci district court litigation, in which the DOJ sought leave to file a statement of interest that raised three overarching arguments: (1) Continental's breach of FRAND claims do not allege that defendants engaged in any unlawful exclusionary conduct, in part because there exists no "antitrust duty" at all to license on FRAND terms; (2) the imposition of antitrust liability for violations of FRAND commitments in the standard-setting context risks "over-deterring conduct that is already adequately policed by contract and patent law"; and (3) a cause of action raised under Section 2 of the Sherman Act that is premised on alleged violations of a FRAND commitment is not "administrable" because it requires courts to act as "central planners". Judge Lynn granted the motion and allowed the government to file its statement of interest, explaining that the statement "assists the Court in evaluating Plaintiff's monopolization claims".
However, in July 2021, President Joseph R. Biden Jr. issued an executive order on competition that directed the Attorney General and Secretary of Commerce to revisit the government's SEP antitrust posture, with that order and subsequent commentary by DOJ officials signaling a return to antitrust enforcement in the SEP context. The Biden administration has since proposed a new policy toward SEP disputes that seeks to balance the interests of both licensors and licensees, returning to the view that injunctions should not be granted in SEP cases when monetary damages are available but retaining some focus on alleged implementer misconduct.
Around the time that it began to pursue that new policy, the government largely ceased its involvement in the Fifth Circuit appeal of the Continental v. Avanci litigation, and indeed distanced itself from the Delrahim DOJ's prior statement of interest. In May 2021, the government filed a letter in the Fifth Circuit appeal, stating that it had not yet "express[ed] its current views of the antitrust issues raised by this case" and offering to do so in an amicus brief if the court were to request one. The court ultimately did not make such a request (and, as noted above, its decision ultimately did not turn on antitrust issues).
Additionally, a DOJ official has since discussed Avanci in the context of the DOJ's business review process, under which organizations may ask the DOJ to determine if it would seek to challenge proposed changes to their intellectual property rights policies. In September 2021, Dr. Jeffrey M. Wilder, Economics Director of Enforcement for the DOJ's Antitrust Division, clarified in a speech that the business review process is not meant to be an outright endorsement of a policy—citing the example of Avanci, which received a favorable business review letter in July 2020. Here, Wilder stated that in issuing that letter, the DOJ "did not endorse . . . the pool's approach of licensing only automakers or take a position on what licensing method was best for the automotive industry".
The administration's draft SEP policy statement has yet to be finalized, and it received significant attention from stakeholders in the meantime during the official public comment period. Numerous public comments were received as of the early February deadline, including 167 comments published as of the date of this report and over 1,000 comments in total.
For more on the proposed new policy, see "Biden Administration Releases Draft of SEP Policy Revamp" (December 2021).
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