Philips North America LLC v. Advanced Imaging Services, Inc.

Opinion

PHILIPS NORTH AMERICA LLC, No. 2:21-cv-00876-JAM-AC Plaintiff, v. ORDER DENYING PLAINTIFF’S MOTION TO DISMISS DEFENDANTS’ INC., d/b/a ADVANCED IMAGING PARTS; and WANG XIUYUAN, a/k/a SEAN WANG, Defendants. ADVANCED IMAGING SERVICES, INC., d/b/a ADVANCED IMAGING PARTS, Counter-Claimant, v. PHILIPS NORTH AMERICA LLC, Counter-Defendant. This case involves a dispute between a manufacturer of medical equipment, Philips North America LLC (“Philips” or “Plaintiff”), and a business that contracts with hospitals and clinics to repair and maintain that equipment, Advanced Imaging Services (“Advanced”). See Compl. ¶¶ 1-2, ECF No. 1. After Philips updated its software to require login credentials to access the equipment’s systems, Advanced allegedly acquired a false or unauthorized login to continue servicing this equipment. Id. ¶¶ 34-41. Philips then brought this action against Advanced and Sean Wang, Advanced’s employee that allegedly used the false login credentials (collectively “Defendants”). Advanced and Wang subsequently filed counterclaims against Philips for violation of the Sherman Antitrust Act, copyright misuse, and violation of California’s Unfair Competition Law. Defs.’ Countercls., ECF No. 91. Philips now moves to dismiss those counterclaims. Pl.’s Mot. to Dismiss Countercls. (“Mot.”), ECF No. 96.1 I. FACTUAL ALLEGATIONS AND PROCEDURAL BACKGROUND The parties are intimately familiar with the material facts and allegations of this case. The Court does not repeat them here. Philips’s Complaint against Advanced and Sean Wang, contained seven claims: (1) violation of the Computer Fraud and Abuse Act; (2) violation of California’s Comprehensive Data Access and Fraud Act; (3) violation of the Digital Millennium Copyright Act; (4) violation of the Defend Trade Secrets Act; (5) violation of California’s Uniform Trade Secrets Act; (6) violation of California’s Unfair Trade Practices Act; and (7) Fraud. Compl. Advanced and Wang moved to dismiss the first, second, fourth, fifth, and seventh causes of action. Defs.’ Mot. to Dismiss, ECF

1 This motion was determined to be suitable for decision without oral argument. E.D. Cal. L.R. 230(g). The hearing was scheduled for February 15, 2022. No. 37. The Court granted this request as to the seventh claim for fraud but declined to dismiss the other claims. Order Granting in Part and Denying in Part Defs.’ Mot. to Dismiss, ECF No. 86. Thereafter, Advanced and Wang answered and asserted counterclaims against Philips for (1) monopolization in violation of Section 2 of the Sherman Antitrust Act; (2) attempted monopolization in violation of Section 2 of the Sherman Antitrust Act; (3) a claim for declaratory relief of copyright misuse; and (4) violation of California’s Unfair Competition Law. Countercls. Philips now moves to dismiss these counterclaims. Mot. Advanced and Wang opposed this motion. Defs.’ Opp’n to Mot. to Dismiss Countercls. (“Opp’n”), ECF No. 100. Philips replied. Philips’ Reply, ECF No. 101. For the reasons set forth below, this motion is denied. A. Legal Standard Dismissal is appropriate under Rule 12(b)(6) of the Federal Rules of Civil Procedure when a plaintiff’s allegations fail “to state a claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). “To survive a motion to dismiss a complaint must contain sufficient factual matter, accepted as true, to state a claim for relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks and citation omitted). While “detailed factual allegations” are unnecessary, the complaint must allege more than “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements.” Id. “In sum, for a complaint to survive a motion to dismiss, the non-conclusory ‘factual content,’ and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief.” Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009). /// B. Analysis 1. Section 2 of the Sherman Act “Section 2 of the Sherman Act prohibits monopolies, attempts to form monopolies, as well as combinations and conspiracies to do so.” Image Tech. Servs., Inc. v. Eastman Kodak Co., 125 F.3d 1195, 1202 (9th Cir. 1997) (citing 15 U.S.C. § 2). “Simply possessing monopoly power and charging monopoly prices does not violate § 2; rather, the statute targets the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” Pac. Bell Tel. Co. v. linkLine Commc’n., Inc., 555 U.S. 438, 447-48 (2009) (internal quotation marks and citation omitted). “Whereas § 1 of the Sherman Act targets concerted anticompetitive conduct, § 2 targets independent anticompetitive conduct.” FTC v. Qualcomm Inc., 969 F.3d 974, 989-90 (9th Cir. 2020). “There are three essential elements to a successful claim of Section 2 monopolization: (a) the possession of monopoly power in the relevant market; (b) the willful acquisition or maintenance of that power; and (c) causal ‘antitrust’ injury.” Allied Orthopedic Appliances Inc. v. Tyco Health Care Grp. LP, 592 F.3d 991, 998 (9th Cir. 2010) (internal quotation marks and citation omitted). To state a claim for attempted monopolization, the plaintiff must allege “(1) that the defendant engaged in predatory or anticompetitive conduct with (2) a specific intent to monopolize and (3) a dangerous probability of achieving monopoly power.” Kaiser Found. Health Plan, Inc. v. Abbott Labs., Inc., 552 F.3d 1033, 1044 (9th Cir. 2009) (internal quotation marks and citation omitted). a. Monopoly Power in the Relevant Market “Plaintiff must plead a relevant market to state an antitrust claim under the Sherman Act[.]” Hicks v. PGA Tour, Inc., 897 F.3d 1109, 1120 (9th Cir. 2018). “The relevant market is the field in which meaningful competition is said to exist” which is generally defined in terms of product and geography. Kodak, 125 F.3d at 1202. The “outer boundaries” of such a market are determined by “the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it.” Brown Shoe Co. v. United States, 370 U.S. 294, 325 (1962). “As such, the relevant market must include the group or groups of sellers or producers who have actual or potential ability to deprive each other of significant levels of business.” Newcal Indus., Inc. v. Ikon Office Sol., 513 F.3d 1038, 1045 (9th Cir. 2008) (internal quotation marks and citation omitted). What constitutes the “relevant market” is typically a factual rather than legal inquiry. Id. However, “there are some legal principles that govern the definition of an antitrust relevant market, and a complaint may be dismissed under Rule 12(b)(6) if the complaint’s relevant market definition is facially unsustainable.” Hicks, 897 F.3d at 1120 (internal quotation marks and citation omitted). Advanced defines the relevant market as “the market for the provision of maintenance, service, and repair on Philips’ CT and MRI machines in the United States.” Countercls. ¶ 31. Philips contends that this market is facially unsustainable warranting dismissal. Mot. at 8. First, Philips argues that “[Advanced] fails to plead sufficient facts that would divorce the Philips-only service aftermarket from the actual, real-world competition that occurs between the various manufacturers of CT and MRI systems.” Id. Because there are three other major manufacturers of CT and MRI equipment – Toshiba, GE, and Siemens – Philips contends the relevant market should include servicing of these brands as well. Id. at 8-10. The Supreme Court’s decision in Kodak is instructive here. In that case independent service organizations that serviced Kodak copying and micrographic equipment brought suit against Kodak under the Sherman Act after Kodak implemented policies that made it more difficult for ISOs to acquire Kodak parts. Eastman Kodak Co. v. Image Tech. Servs., 504 U.S. 451, 455-58 (1992). Kodak argued that a single brand of product or service can never constitute the relevant market under the Sherman Act. Id. at 481. The Supreme Court disagreed finding that a single- brand aftermarket for parts and service of Kodak equipment could arise once customers had purchased and were “locked in” to Kodak equipment. Id. at 477-482. The Court reasoned that “[b]ecause service and parts for Kodak equipment are not interchangeable with other manufacturers’ service and parts, the relevant market from the Kodak equipment owner’s perspective is composed of only those companies that service Kodak machines.” Id. at 482. This is exactly what Advanced alleges here — a derivative aftermarket in servicing Philips equipment. As in Kodak, Philips made this change after the sale of the primary good, when purchasers were “locked in”. See id. at 476-77. Thus, these purchasers could not have had information about the restricted aftermarket at the time of purchase. See Oracle Am., Inc. v. Terix Comput. Co., Inc., No. 5:13-cv-03385-PSG, 2014 WL 5847532, at *6 (N.D. Cal. Nov. 7, 2014) (“Certainly these customers who had purchased Solaris products before the merger could not have consented to the alleged restrictive aftermarket because at the time it did not exist.”). Because service for Philips’s equipment is not interchangeable with other manufactures’ service, the relevant market from the Philips equipment owner’s perspective is composed of only those companies that service Philips machines. See Kodak, 504 U.S. at 482. Nor is the Court persuaded by Philips’ argument that the market is facially unsustainable since it contains two types of machines. Mot. at 11. Market realities may warrant a single market for both. See Kamakahi v. Am. Soc. for Reprod. Med., No. C 11-01781 SBA, 2013 WL 1768706, at *10 (N.D. Cal. Mar. 29, 2013) (“Because market definition is a deeply fact-intensive inquiry, courts hesitate to grant motions to dismiss for failure to plead relevant product market.”). If not, Advanced may proceed on a theory that Philips holds monopolies over two relevant service markets, as the ISOs did in Kodak. See Kodak, 125 F.3d at 1203 (“the ISOs proceeded on the theory that Kodak held monopolies over two relevant parts markets: the Kodak photocopier parts market and the Kodak micrographic parts market.”). Accordingly, Philips has failed to show the relevant market alleged by Advanced is facially unsustainable. Advanced has also sufficiently alleged Philips has monopoly power in this market. The existence of monopoly power “ordinarily is inferred from the seller’s possession of a predominant share of the market.” Kodak, 504 U.S. at 464. “Where such an inference is not implausible on its face, an allegation of specific market share is sufficient, as a matter of pleading, to withstand a motion for dismissal.” Hunt-Wesson Foods, Inc. v. Ragu Foods, Inc., 627 F.2d 919, 925 (9th Cir. 1980). Advanced alleges that Philips has a 90 percent market share. Countercls. ¶ 35. This is sufficient to overcome a motion to dismiss. See Actividentity Corp. v. Intercede Grp. PLC, No. C 08-4577 VRW, 2009 WL 8674284, *4 (N.D. Cal. Sept. 11, 2009) (finding allegations that the party had approximately 90% of the market were sufficient to allege monopoly power). b. Anticompetitive Conduct “To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct.” Verizon Commc’ns. Inc v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004). The conduct element requires “the use of monopoly power to foreclose competition, to gain a competitive advantage, or to destroy a competitor.” Kodak, 125 F.3d at 1208 (internal quotation marks omitted). “Anticompetitive conduct is that which is without a legitimate business purpose that makes sense only because it eliminates competition.” Sambreel Holdings LLC v. Facebook, Inc., 906 F.Supp.2d 1070, 1081 (S.D. Cal. 2012). Advanced alleges that Philips engaged in anticompetitive conduct by limiting access to the machine’s operating menu, operating systems, and diagnostic software, which effectively blocked all ISOs, including Advanced, from competing with Philips in the service market for these machines. Countercls. ¶¶ 15-18. “Specifically, Philips unrolled a series of firmware updates to its imaging equipment that, for the first time, imposed a new log-in screen that blocks anyone without Philips access credentials from accessing any part of the equipment’s operating menu, operating systems, or diagnostic software.” Id. ¶ 17. This prevented Advanced, and other ISOs, from servicing the equipment. Id. ¶ 18. Philips contends that these allegations are insufficient to demonstrate anticompetitive conduct. Mot. at 12-14. Philips argues that it has no duty to aid Advanced, its competitor, by licensing their software. Mot. at 12-14. This, however, misconstrues Advanced’s claim. Advanced’s theory of anticompetitive conduct is not that Philips refused to deal with Advanced and grant it a license. Opp’n at 12. Rather, the anticompetitive conduct alleged is the implementation of this new technological barrier for the sole purpose of preventing ISOs access. Id. Philips responds that it has a “right to develop the security features of its intellectual property via firmware updates.” Mot. at 14. At this stage though, the Court must accept as true Advanced’s factual allegations and view them in the light most favorable to Advanced. See Mansarket v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). Advanced has alleged that Philips had no legitimate business reason for this update and did so only to limit competition in the service market. Countercls. ¶ 30. This is sufficient to allege anticompetitive conduct. See Epicor Software Corp. v. Alt. Tech. Sols., Inc., No. SACV 13-00448-CJC (RNBx), 2013 WL 3930545, at *3 (C.D. Cal. June 21, 2013) (finding allegations that Epicor coerced customers into using only Epicor authorized partners to provide service for the ERP Platform without any valid business reason sufficient to plead anticompetitive conduct). Accordingly, the Court denies Philips’ motion to dismiss Advanced’s monopolization and attempted monopolization claims. 2. Copyright Misuse “Copyright misuse is a judicially crafted affirmative defense to copyright infringement [. . .]” Apple Inc. v. Psystar Corp., 658 F.3d 1150, 1157 (9th Cir. 2011). Courts have also allowed it to be asserted as an affirmative claim for declaratory relief. See Apple Inc. v. Psystar Corp., No. C 08- 03251 WHA, 2009 U.S. Dist. LEXIS 14370, at *8 (N.D. Cal. Feb 6, 2009). The “purpose of the defense” is to “prevent[] holders of copyrights from leveraging their limited monopoly to allow them control of areas outside the monopoly.” Apple, 658 F.3d at 1157 (internal quotation marks and citation omitted). The doctrine “does not prohibit using conditions to control use of copyrighted material, but it does prevent copyright holders from using the conditions to stifle competition.” Id. at 1159. The Ninth Circuit has “applied the doctrine sparingly.” Id. at 1157. Philips, relying on Triad Systems Corporation v. Southeastern Express Company, 64 F.3d 1330 (9th Cir. 1995), argues Advanced has failed to state a claim for copyright misuse. Mot. at 4. In Triad, the plaintiff designed computers for use in the automotive industry and licensed unique diagnostic software to service those computers. Id. at 1333. The defendant was an independent service organization that serviced Triad computers. Id. Triad sued the defendant for copyright infringement based on its unauthorized use of their diagnostic software. Id. The Ninth Circuit rejected defendant’s copyright misuse claim because “Triad did not attempt to prohibit [the defendant] or any other [independent service organization] from developing its own service software to compete with Triad.” Id. at 1337. Philips argues that Advanced fails to state a claim for misuse as it does not allege “Philips conditions licensure of its copyrights on terms that prevent [Advanced] or anyone else from developing, offering, or using software (i.e. diagnostic software) that competes with Philips’.” Mot. at 5. Philips again misconstrues Advanced’s claim. Advanced’s misuse claim is not premised on Philips’ failure to issue it a license to its software or placing conditions on its licenses. Opp’n at 14. Rather, Advanced alleges that Philips has “leveraged the limited monopoly granted by its copyrights on certain aspects of its software in order to restrict access to all systems in its CT and MRI machines – whether legitimately protected or not.” Opp’n at 13. In other words, Advanced alleges that Philips locked Advanced and other ISOs out of its systems in order to prevent competition in the servicing market under the guise of protecting their copyrighted material. Thus, Advanced claims Philips leveraged its limited monopoly on its diagnostic software to control an area outside this monopoly — the ability to service Philips machines. Unlike in Triad, this would prevent the ISOs from developing their own servicing software to compete with Philips, as such software would be useless without access to the systems to use it. This is sufficient to state a claim of copyright misuse. See Omega S.A. v. Costco Wholesale Corp., 776 F.3d 692, 705 (9th Cir. 2015) (Wardlaw, J., concurring) (noting that if Apple placed a few lines of programming code from its copyrighted software onto a piece of computer hardware that was not entitled to intellectual property protection, with the express purpose of using its copyright to restrict competing retailers from selling that hardware at discounted prices, that would constitute copyright misuse); see also Philips N. Am., LLC v. Summit Imaging Inc., No. C19-1745-JLR, 2020 WL 6741966, at * 8 (W.D. Wash. Nov. 16, 2020) (finding ISO had stated a copyright misuse claim by alleging Philips enforced its copyrights with the intent to exclude competition in the market for service and repairs). As such, the Court declines to dismiss Advanced’s copyright misuse counterclaim. 3. Noerr-Pennington Doctrine The Noerr-Pennington doctrine derives from the First Amendment’s guarantee of “the right of the people [. . .] to petition the Government for a redress of grievances.” U.S. Const. amend. I. “Under the Noerr-Pennington doctrine, those who petition any department of the government for redress are generally immune from statutory liability for their petitioning conduct.” Sosa v. DIRECTV, Inc., 437 F.3d 923, 929 (9th Cir. 2006). “However, where a party engages in ‘sham’ petitioning, Noerr-Pennington immunity does not apply.” Meridian Project Sys., Inc. v. Hardin Const. Co., LLC, 404 F.Supp.2d 1214, 1220 (E.D. Cal. 2005). “The ‘sham’ litigation exception exempts from Noerr-Pennington immunity activity ‘ostensibly directed toward influencing governmental action’ that ‘is a mere sham to cover [. . .] an attempt to interfere directly with the business relationships of a competitor.’” Id. (quoting E. R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 144 (1961)). Philips reliance on the Noerr-Pennington doctrine does not alter the Court’s analysis. Philips has “not done it justice by making what is effectively a passing reference to it in their briefs, and the Court declines to take it up in that underdeveloped form.” Shen v. Albany Unified Sch. Dist., 3:17- cv-02478-JD, 2018 WL 4053482, at *4 (N.D. Cal. Aug. 24, 2018). Philips bears the burden on its motion to dismiss, and it has failed to carry it here. Estate of Osuna v. Cty. of Stanislaus, 392 F.Supp.3d 1162, 1179 (E.D. Cal. 2019) (finding defendant’s insufficient briefing on an issue did not support dismissal). nee nn ee EO IE ONE I

4, California Unfair Competition Law The parties agree Advanced’s California Unfair Competition Law (“UCL”) counterclaim is dependent on, and correlates, with the federal claims. See Mot. at 15; Opp’n at 15. Because Advanced’s federal counterclaims survive, so too does the UCL counterclaim. See Sidibe v. Sutter Health, No. 12-cv-04854, 2021 WL 879875, at *10 (N.D. Cal. Mar. 9, 2021) (“The UCL claim survives to the extent that the underlying claims survive.”). Til. ORDER For the reasons set forth above, the Court DENIES Philips’ Motion to Dismiss Defendants’ counterclaims. Dated: April 15, 2022 kA teiren staves odermacr 7008 14