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Lotes Co., Ltd. v. Hon Hai Precision Industry Co. Ltd.

May 14, 2013

LOTES CO., LTD., PLAINTIFF,
v.
HON HAI PRECISION INDUSTRY CO. LTD.; FOXCONN INTERNATIONAL HOLDINGS, LTD.; FOXCONN INTERNATIONAL, INC.; FOXCONN ELECTRONICS, INC.; AND FOXCONN (KUNSHAN) COMPUTER CONNECTOR CO., LTD., DEFENDANTS.



The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.

OPINION AND ORDER

Lotes Co., Ltd. ("Lotes" or "plaintiff") has brought suit against Hon Hai Precision Industry Co. Ltd. ("Hon Hai"), Foxconn International Holdings, Inc. ("Foxconn IH"), Foxconn International, Inc. ("Foxconn International"), Foxconn Electronics, Inc. ("Foxconn Electronics") and Foxconn (Kunshan) Computer Connector Co., Ltd. ("Foxconn Kunshan").*fn1 Lotes alleges violtions of sections one and two of the Sherman Act.*fn2 Lotes also brings claims for breach of contract, promissory estoppel, waiver, tortious interference with contract, and declaratory judgment. Defendants Hon Hai, Foxconn IH, Foxconn International and Foxconn Electronics (collectively, the "defendants") move to dismiss the First Amended Complaint ("FAC") in its entirety pursuant to Federal Rule of Civil Procedure 12(b)(6).*fn3 For the following reasons, defendants' motion is granted.

I. BACKGROUND

A. The USB 3.0 Standard

Universal Serial Bus ("USB") connectors are used primarily to connect computer peripherals, such as hard drives, printers and keyboards, to personal computers, smart phones and other electronic devices.*fn4 The USB 3.0 is the latest generation of USB connectors.*fn5 A "standard" is basically a common set of technological specifications to be used industry-wide with regard to a particular technology. "A standard, by definition, eliminates alternative technologies."*fn6 "To facilitate interoperability among chipmakers, device makers, and computer makers, among others, companies participate in the development of technical standards that establish precise specifications for the interfaces, such as [USB] connectors, between devices."*fn7 Standards often incorporate patented technology and other proprietary intellectual property ("IP") rights.*fn8

Standards are typically established by private standard-setting organizations ("SSOs"). The SSO governing USB standards is the USB Implementers Forum, Inc. ("USB-IF").*fn9 The USB-IF vetted and incorporated the patents and other IP included in the USB 3.0 Standard.*fn10 By incorporating proprietary IP rights into an industry-wide standard, the USB-IF weighed "significant pro-competitive benefits with significant anti-competitive risks."*fn11

"On the pro-competitive side, standards have the potential to encourage innovation and promote competition."*fn12 "On the anti-competitive side, technical standardization also creates a 'lock-in' effect and a risk of 'patent hold-up.'"*fn13

Patent hold-up has been explained by the Third Circuit as follows:

Inefficiency may be injected into the standard-setting process by what is known as "patent hold-up." An SDO [standards-determining organization] may complete its lengthy process of evaluating technologies and adopting a new standard, only to discover that certain technologies essential to implementing the standard are patented. When this occurs, the patent holder is in a position to "hold up" industry participants from implementing the standard. Industry participants who have invested significant resources developing products and technologies that conform to the standard will find it prohibitively expensive to abandon their investment and switch to another standard. They will have become "locked in" to the standard. In this unique position of bargaining power, the patent holder may be able to extract supracompetitive royalties from the industry participants.*fn14

Thus, '[i]n the absence of an agreement between a contributor and an SSO, the possessors of such proprietary IP rights could demand exorbitant terms from their licensees -- or even refuse to license their rights altogether."*fn15 Consequently, SSOs typically secure agreements wherein the technology-contributing parties agree to license all incorporated technology on reasonable and non-discriminatory ("RAND") terms as a necessary condition for adoption of a particular standard.*fn16

"RAND licenses are thus central to the viability of an SSO and the standards it promulgates."*fn17

To ensure that the USB 3.0 Standard remains pro-competitive, contributing parties otherwise known as "Contributors" must sign the USB 3.0 Contributors Agreement (the "Contributors Agreement").*fn18 Defendants executed the same Contributors Agreement signed by Lotes on December 11, 2007.*fn19

Section 3.4 of the Contributors Agreement, entitled "Limited Patent Licensing Obligations in Contributions," obligates defendants to grant to any "Adopter" a "non-exclusive world-wide license under any Necessary claim of a patent or patent application . . . on a royalty-free basis and under otherwise reasonable and non-discriminatory ('RAND-Zero') terms . . . ."*fn20 Lotes is an Adopter given that it signed the USB 3.0 Adopters Agreement (the "Adopters Agreement"*fn21 ) within the required Adoption Period.*fn22 Defendants executed the same Adopters Agreement signed by Lotes.*fn23 Accordingly, "[d]efendants, like Lotes, are therefore both

'Contributors' and 'Adopters' of the USB 3.0 Standard and are therefore bound by the terms of the USB-IF Contributors Agreement and Adopters Agreement . . . ."*fn24

The USB-IF thereby represents to Adopters that it has secured royalty-free licenses for all patents and other IP needed to practice the USB 3.0 Standard.*fn25

B. The Dispute

Lotes is a Chinese corporation as are defendants Hon Hai and Foxconn Kunshan.*fn26 Lotes competes directly with defendants in making and selling USB 3.0 connectors.*fn27 Because USB connectors are incorporated into other components and products, companies that manufacture them "typically sell directly to notebook manufacturers and to companies making motherboards for servers and desktops."*fn28 As a result, "both Lotes and the Defendants directly compete for market share in the markets for USB 3.0 connectors for notebooks, desktops, and servers by selling to the following ODMs [original design manufacturers] who make and assemble computer products [in China] for many well-known brands."*fn29

Lotes has made repeated good faith attempts to negotiate with Hon Hai regarding the RAND-Zero licensing terms set forth in the Contributors Agreement and Adopters Agreement.*fn30 Hon Hai has steadfastly refused to license certain USB 3.0 Standard patents to Lotes despite its efforts.*fn31 Instead, Foxconn Kunshan brought two patent infringement suits in China against two Lotes subsidiaries in order to enjoin Lotes from making and selling certain USB 3.0 connectors.*fn32 In the first patent proceeding, Foxconn Kunshan asserted two Chinese patents, the "608.0 patent" and the "623.1 patent," against Lotes SuZhou, a Lotes subsidiary located in eastern China.*fn33 Foxconn Kunshan initiated a second patent enforcement proceeding asserting the same two patents against Lotes GuangZhou, a Lotes subsidiary located in southern China.*fn34 According to Lotes, "the asserted claims of the '608.0 patent and the '623.1 patent are 'Necessary Claims' and 'Contributions' as defined by the Contributors Agreement, which were contributed by at least one of the Foxconn Defendants and/or Hon Hai."*fn35

Thus, plaintiff argues that "the claims being asserted in China are Necessary Claims as defined in the Contributors Agreement and Adopters Agreement signed by Defendants and must be licensed to Lotes on RAND-zero terms."*fn36 Only two USB 3.0 connectors were specifically named in the patent enforcement proceedings brought by Foxconn Kunshan.*fn37 Foxconn Kunshan did not challenge the eleven other USB 3.0 connectors manufactured by Lotes in China.*fn38

C. Anti-competitive Allegations

No party in the instant action is alleged to manufacture or directly sell any USB 3.0 connectors in the United States. Notwithstanding this lack of domestic activity, plaintiff claims that defendants' conduct is causing cognizable antitrust injury in the United States.

The relevant markets for assessing Defendants' antitrust conduct include those for USB 3.0 connectors and are the markets for USB 3.0 connectors suitable for integration into motherboards powering notebooks, desktop computers and servers. . . . Defendants are wrongfully using their foreign patents to raise prices and exclude competition in the USB

3.0 connector market in the United States. Defendants acquired this power as a result of misrepresentations to the USB-IF during the standards-setting process and/or a refusal to adhere to the obligations that they undertook to the USB-IF and its adopters (including Lotes).*fn39

Plaintiff alleges that "[d]efendants' anticompetitive behavior is designed either to foreclose Lotes from several relevant competitive markets or to raise Lotes' costs in those markets to the point that Lotes becomes uncompetitive and Defendants become a monopoly, which is their professed intention."*fn40

According to plaintiff, "[a]nything that affects the price, quantity, or competitive nature of the production market for USB 3.0 connectors will therefore have a direct, substantial, and reasonably foreseeable effect on U.S. commerce in precisely the ways that the antitrust laws were created to prevent."*fn41 Arguably, then, the patent enforcement proceedings against Lotes SuZhou and Lotes GuangZhou "threaten a potentially significant decrease in competition in the United States markets for: USB 3.0 connectors; motherboards containing USB 3.0 connectors; and notebooks containing USB 3.0 connectors."*fn42 In sum, plaintiff claims that "Defendants' willingness to bring suit against Lotes in contravention of the USB-IF ...


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