ANTHONY J. TRENGA, District Judge.
On June 19, 2013, Intellectual Ventures I, LLC and Intellectual Ventures II, LLC (collectively, "Intellectual Ventures") filed suit against Capital One Financial Corporation, Capital One Bank (USA), National Association and Capital One, National Association (collectively, "Capital One") alleging patent infringement, In response to plaintiffs' complaint, Capital One filed its Answer and First Amended Counterclaims [Doc. No. 88], in which it asserted a defense alleging "patent misuse" (the "Eighth Defense") based on the antitrust laws and also added as counterclaim defendants a group of entities affiliated with intellectual Ventures (collectively, with Intellectual Ventures, referred to as "IV"). Counts 11, 12 and 13 of the Amended Counterclaims assert antitrust claims under Section 2 of the Sherman Antitrust Act and Section 7 of the Clayton Act.
IV has filed a Motion to Strike or Dismiss Amended Antitrust Counterclaims 11, 12, and 13 and Eighth Affirmative Patent Misuse Defense (the "Motion to Dismiss") [Doc. No. 104] and also an alternative Motion for Separate Trial on Antitrust and Patent Misuse Issues and to Stay Discovery on Those Issues [Doc. No. 112]. A hearing was held on these motions on November 15, 2013, following which the Court took these motions under advisement. By Order dated December 5, 2013 [Doc. No. 151], the Court granted IV's Motion to Dismiss [Doc. No. 88] and denied as moot its Motion for Separate Trial on Antitrust and Patent Misuse Issues and to Slay Discovery on Those Issues [Doc. No. 112]. The Court now issues this Memorandum Opinion in further support of its Order.
I. Allegations Concerning Patent Misuse and Monopolization.
In its Eighth Defense, Capital One alleges patent misuse based on (1) the impermissible collection of royalties from invalid patents and (2) unlawful monopolization. In its First Amended Counterclaims, Capital One alleges (1) monopolization under Section 2 of the Sherman Act (Count 11); (2) attempted monopolization under Section 2 of the Sherman Act (Count 12); and (3) unlawful asset acquisition in violation of Section 7 of the Clayton Act (Count 13). Capital One makes essentially the same allegations in support of both its patent misuse defense and its antitrust counterclaims, summarized as follows.
IV is a patent assertion entity ("PAE"), more commonly known as a "patent troll." It holds a portfolio of approximately 80, 000 patents and patent applications, the world's largest, including 3, 500 patents applying to the "technology market for financial institutions." Amend. Answer and Counterclaims at 26 ¶ 62. IV has no commercial purpose other than to engage in the "submarine' hold-up" of innovators like Capital One that provide goods and services to consumers. Id. at 27 ¶ 63. It accomplishes its anticompetitive business objectives through "[s]ecrecy, misdirection, and obfuscation, " including through the use of a "labyrinthine network of some 2000 shell companies." Id. These shell companies conceal IV's patents so that "targets have no idea that it is building walls of patents around their businesses" and then "when [IV] does launch its attack, its targets cannot assess or value its portfolio and thus among other things cannot determine whether they could avoid [IV]'s infringement claims by redesigning their accused products or processes." Id.
IV targets almost exclusively the "ex post" licensing market for "technology enabling business processes common throughout the commercial banking industry in United States" (that is, after companies have already made their investments in technological solutions), as opposed to the "ex ante" technology licensing market (where companies assess competing technological solutions before making investments, based on known patents and the available licensing terms). Id. at 27 ¶ 64-65. Whereas the ex ante licensing markets are generally competitive and efficiently distribute technology that benefits "downstream consumers who enjoy superior products at reduced cost, " the ex post licensing market exploited by IV involves "innovators who have already built products and services incorporating widely known technologies." Id. at 27-28 ¶ 65. "By this [ ex post ] stage, companies have sunk large investments (many of them long length, fixed capital assets, often without any significant alternative use) into their product lines, meaning they can no longer cheaply abandon their chosen product designs." Id. For these reasons, "[e]x post, makers and buyers of technological products, are to a significant degree, locked-in, which makes them attractive targets for [IV]'s litigation scheme for extracting supracompetitive licensing fees through coercion and deception." Id. at 28 ¶ 65.
Overall, IV "knows or should reasonably know that many if not most of the 3, 500 patents in its financial services patent portfolio are irrelevant, invalid, not infringed, and/or unenforceable, " and "due to their probable invalidity, and the risk of countersuit to those who might enforce them, such patents provide their owners with no market power." Id. at 13, 29 ¶ 68. Nevertheless, "the possible irrelevance, invalidity, and unenforceability of the patents in [IV]'s financial services portfolio is not an impediment to [IV's] strategy because, unlike a bona fide portfolio licensing, [IV]'s business model is not based on the licensing of valuable patent rights, rather on the threat of asserting thousands of patents in a never-ending series of costly and disruptive patent infringement lawsuits - pummeling its victims into submission." Id. at 12. These threats of litigation are made more credible because IV "is not itself subject to such infringement allegations from members of the financial services industry whom it attacks." Id. For these reasons, "... the very trails that rendered those patents invalid make them attractive to IV, which realizes that, by combining enough of them, it can make sweeping claims of infringement" and as a result, IV has the ability to "turn straw into gold" and "acquire[) monopoly power where there was previously none." Id. at 14, 29¶ 68-69. "[IV] creates an inescapable threat by aggregating so many weak patents that it can attack successful products and redesigned alternatives. [IV] thus eliminates competition and cuts off escape avenues for the innovators it attacks." Id. at 29 ¶ 69.
IV implements its scheme through "sham litigation in bad faith, regardless of the relevance, validity, enforceability of patents or the likelihood of success on the merits at trial, with the intent of using the federal court process, as opposed to the outcome of that process, as an anti-competitive weapon to increase pricing power in the relevant market." Id. at 17. It pursues "meritless patent claims" against Capital One and other U.S. commercial banks "without any realistic expectation of actually securing damages or other relief, i.e., motivated by a desire to impose collateral, anticompetitive injury, rather than to obtain a justifiable legal remedy." Id., at 32-33 ¶ 74. "Through threats and lawsuits, [IV] is forcing and seeking to force U.S. commercial banks, including Capital One, to license vast patent portfolios that likely include hundreds if not thousands of patents - including the Patents-in-suit - that do not read on the products and/or services offered by such financial institutions and that are of doubtful validity and enforceability, " Id. at 12. IV's "campaign of extraordinary patent accumulation and litigation [has]... no cognizable procompetitive justification and lacks any efficiency-enhancing effects sufficient to outweigh its enormous anticompetitive impact." Id. at 33 ¶ 75. As a result of IV's scheme, "[IV] has thus impermissibly broadened the scope of the patents in suit by using them to obtain a market benefit, beyond that which inheres in the statutory patent right, for exclusionary, purposes and in a manner that has substantial anticompetitive effects, " Id. at 14.
The anti-competitive effects of IV's conduct are far-reaching and severe. First. "[b]y forcing its victims to either face endless, costly and disruptive patent litigation or accept licenses to thousands of potentially irrelevant, invalid, and/or unenforceable patents, [IV] eliminates the economic incentive of its coerced licensees to challenge the validity of individual patents within the portfolio, and causes anticompetitive effects contrary to public policy." Id. at 13. Second, it reduces the incentive to innovate, since "Mompanies such as Capital One foresee that if they achieve success by selling a product with enough revenue to attract [IV], [IV] will seek to tax' it." Id. at 17. Third, IV has "repeatedly demonstrated its power to raise prices for its portfolio of patents by successfully charging supra-competitive royalties without suffering loss of demand or sales toward other licensors." Id. at 14. Rather, its extracted royalties, reflecting the "hold-up' value" of the patents rather than their economic worth, will cause an increase in prices to consumers, a reduction in the rewards for successful innovation, and a decline in the quantity, quality and rate of innovation; the future "inputs" into the innovation process are restricted, and the costs of commercial banking operations are increased. Id. at 33 ¶ 76.
As a result of IV's tactics and strategies, U.S. commercial banks, such as Capital One, have no real economic choice other than to capitulate to IV's unreasonable and anticompetitive demands. IV "creates an inescapable threat" and "cuts off escape avenues for the innovators it attacks." Id. at 29 ¶ 70. "In the face of these anticompetitive practices, a rational financial services target would more likely than not pay for limited patent peace, even if [IV] does not have a single valid and infringed patent in its financial services portfolio." Id. at 16.
By being forced to operate under constant threat of "hold-up, " Capital One specifically has been injured in its business and property by IV's anticompetitive conduct, thereby endangering Capital One's "fixture design freedom, cash resources and investment in innovation, and burdening its management time and other resources in defending itself in this action and in the future." Id. at 34 ¶ 78.
A. Count 11 of the First Amended Counterclaim: Monopolization under Section 2 ...