Monday, March 14, 2022

The Fifth Circuit's Decision in Continental v. Avanci

On February 28, the United States Court of Appeals for the Fifth Circuit held in Continental Automotive Systems, Inc. v. Avanci, L.L.C., that Continental--a maker of telematics control units (TCUs) used in automobiles--lacked article III standing to pursue its claims that Avanci, a patent pool, and its SEP owner codefendants (including Nokia, Optis, and Sharp entities) violated sections 1 and 2 of the Sherman Act by refusing to license FRAND-committed SEPs to Continental (as opposed to end-user automobile manufacturers).  Put another way, the claims alleged that the defendants' refusal to license any member of the supply chain ("license-to-all"), in preference to a policy of licensing end users only ("access-to-all") is an antitrust violation (as well as a breach of contract under state law).  The district court had held, inter alia, that Continental failed to allege "antitrust injury" (that is, injury of a type the antitrust laws were intended to prevent), and that in any event the allegations did not state a claim upon which relief may be granted under federal antitrust law.   Without expressly addressing either of these issues, however, the Fifth Circuit majority holds that Continental did not allege a sufficient injury of any sort to sustain article III standing, a necessary prerequisite to federal jurisdiction in the United States.  In reaching this conclusion the states, among other things, that even if 

Continental is contractually entitled to a license on FRAND terms as a third-party beneficiary, the pleadings reflect that it has suffered no cognizable injury. . . .  [T]he contracts have not been breached because the SEP holders have fulfilled their obligations to the SSOs 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" (pp. 11-12).

Commentators are suggesting that, as a practical matter, the case probably sounds the death knell for "license to all" (see, e.g., here and here), and they may be right (unfortunately, in my view).  

Be that as it may, I am inclined to think that it would have been preferable to decide the case on the merits rather than to dismiss for lack of standing, for reasons suggested by the following thought experiment.  Suppose, for the sake of argument, that the FRAND commitment at issue is best construed as standing for the proposition that SEP owners must offer licenses to all, including component manufacturers; but that a group of SEP owners breaches the policy by offering licenses to end users only.  Presumably the SEP owners would argue that licensing at the end user level alone is more efficient because it conserves on transaction costs; component suppliers, in contrast, may argue that the actual purpose and effect is to extract higher (above-FRAND) royalties than would otherwise be possible.  Without passing on the merits of who's right about the rationale for the de facto "access to all" policy, shouldn't the component manufacturer at least have the ability to challenge that policy in court, if there is a reasonable argument that the FRAND commitment entitles it to a license?

The court here effectively says no--that the denial of a license to the component manufacturer does not cause the latter to suffer any cognizable harm, at least absent allegations (not present in the real case, according to the Fifth Circuit, see pp. 7-9) that the end users demand that component manufacturers indemnify them for having to pay above-FRAND royalties.  And that may sound reasonable--after all, in theory it preserves the ability of the end users to assert claims that they are being harmed by the access-to-all policy--but is it consistent with recent Supreme Court case law reaffirming that federal courts otherwise vested with subject matter jurisdiction can adjudicate claims for violations of common-law rights such as breach of contract, even if there is no showing of injury apart from the fact of the violation?  (To be sure, the Fifth Circuit majority expressed skepticism that Continental itself has any contract rights as a merely "incidental" third-party beneficiary, see p.11.  But the paragraph quoted above proceeds on the assumption that it does.)  Of course, federal jurisdiction in the present case hinges on the viability of the federal antitrust claim, not any state-law breach of contract claims, and the antitrust statute requires proof of injury to business or property; so maybe that makes all the difference, though it seems to me that that issue would be more appropriately discussed as a matter of antitrust injury/antitrust standing than constitutional standing, as the district court judge and the concurring appellate court judge believed.  Or maybe the Fifth Circuit majority simply is saying, without being explicit about it, that the FRAND commitment at issue requires only access-to-all; but if so, it would have been useful to review the actual language of the commitment before reaching that implicit conclusion.         

No comments:

Post a Comment