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Nero AG v. MPEG LA


November 24, 2010


The opinion of the court was delivered by: Hon. Mariana R. Pfaelzer United States District Judge



Plaintiff Nero AG ("Nero") brings this antitrust lawsuit against Defendant MPEG LA, LLC*fn1 ("MPEG LA") and Does 1 through 10 for anticompetitive conduct in MPEG LA's licensing of patent pools related to industry standards for consumer electronics. Nero contends MPEG LA has violated Section 2 of the Sherman Antitrust Act, 15 U.S.C. § 2, by unlawfully maintaining, extending, and/or abusing its monopoly power. The Court dismissed without prejudice Nero's first complaint for failure to state a claim upon which relief can be granted. See Nero AG v. MPEG LA, L.L.C., No. 10-cv-3672-MRPRZ, 2010 WL 4366448 (C.D. Cal. Sep. 14, 2010). The Court found the complaint lacked the necessary factual allegations to raise its claim above the level of speculation and hypothesis, but granted Nero an opportunity to amend.*fn2 Nero filed a First Amended Complaint ("FAC") on October 4, 2010, which MPEG LA now moves to dismiss on the ground that Nero has failed to remedy the defects in its pleading. The Court agrees and DISMISSES the FAC with prejudice.


Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint if it fails to state a claim upon which relief can be granted. In deciding whether the plaintiff has stated a claim upon which relief can be granted, the Court must assume that the plaintiff's allegations are true and must draw all reasonable inferences in the plaintiff's favor. See Usher, 828 F.2d at 561. However, the Court is not required to accept as true "allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences." In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008). Moreover, the Court will not accept legal conclusions cast in the form of factual allegations if those conclusions cannot reasonably be drawn from the facts alleged. Clegg v. Cult Awareness Network, 18 F.3d 752, 754-55 (9th Cir. 1994).

As the Court explained in detail in its prior Order, "to survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (quoting in part Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)); see also Nero AG, 2010 WL 4366448, at *5. "The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Iqbal, 129 S.Ct. at 1949. "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Id. "Determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 1950.


The FAC relies on three basic allegations: (1) Nero has no practical alternative to licensing from the MPEG-2 pool; (2) MPEG LA has impermissibly expanded the temporal scope of its monopoly by adding non-essential patents with later term expiration dates to the MPEG-2 patent pool; and (3) MPEG LA coerced licensees into an Extended MPEG-2 License, which cannot be cancelled until January 31, 2016. None of these allegations have the factual foundation to raise them above the speculative level.

1.Economic Unfeasibility of Direct Licensing

Nero's monopolization claim continues to rely heavily on the economic unfeasibility of individual licensing, but Nero has not demonstrated any attempt to license the necessary patents individually. "The burden of proving lack of a realistic opportunity to license directly cannot be met where a plaintiff never makes an inquiry or attempts to negotiate a single individual license." Nero AG, 2010 WL 4366448, at *6(citing Matsushita Elec. Indus. Co., Ltd. v. Cinram Int'l, Inc., 299 F. Supp. 2d 370, 377-78 (D. Del. 2004)). As the Court explained in its prior Order, because Nero has not tried to individually license only the patents it needs, its argument that direct licensing is economically infeasible remains a speculative hypothesis. See id.

The FAC includes a new allegation that it would cost Nero $7 million to determine which essential patents Nero must license to comply with the MPEG-2 standard.*fn3 FAC ¶ 42. Even if Nero's estimate were accurate, this allegation adds nothing to pleading because the time and effort Nero will have to expend to determine which patents it needs to license to avoid infringement litigation is irrelevant to the feasibility determination. Nero AG, 2010 WL 4366448, at *6(citing Buffalo Broadcasting Co., Inc. v. Am. Soc'y of Composers, Authors & Publishers, 744 F.2d 917, 926 (2d Cir. 1984); Columbia Broadcasting Sys., Inc. v. Am. Soc'y of Composers, Authors & Publishers, 620 F.2d 930, 936 (2d Cir. 1980); Cinram Int'l Inc., 299 F. Supp. 2d at 378-79); see also Nero AG, 2010 WL 4366448, at *7 (rejecting Nero's "prohibitively expensive" justification for failing to identify non-essential patents). Thus, having already rejected Nero's excuse that it would be cost-prohibitive for Nero to determine which patents it needs to license in order to practice its technology without infringing, the Court concludes again that Nero has failed to plausibly allege that direct licensing is infeasible.

2.Predatory Conduct: Willful Addition of Non-Essential Patents

Nero's allegations of predatory conduct continue to be premised on inference. Nero infers that because of the "drastic and unforeseen increase in the number of patents" in the patent pool, MPEG LA must have added hundreds of non-essential patents to the pool for predatory purposes. Compl. ¶ 11(b); FAC ¶ 11(b). The Court found Nero's original allegations were unsupported by any actual investigation into the essentiality of the patents in the pool because, for instance, Nero "fail[ed] to name even one example of one patent that is non-essential and added for the purpose of unlawfully extending the temporal scope of the patent pool." Nero AG, 2010 WL 4366448, at *7.

To its discussion of nonessential patents in the MPEG-2 pool, the FAC adds six examples of nonessential patents that Nero alleges were added for predatory purposes. Nero includes the following patents and the corresponding parenthetical descriptions in the FAC: U.S. Patent Nos. 5,420,866 (encryption, transmission of multiple program streams, and remote tower transmission and the like); 4,833,543 (hardware-implemented MPEG-2); 4,849,812 (same); 5,457,701 (remote tower transmission and the like); 5,461,420 (telecine processing schemes); 5,453,790 (digital playback in real time). FAC ¶ 40. Nero alleges: Those patents and others are not infringed by the products offered by Nero and other similarly-situated (MPEG-2-compliant) companies, and, as a result, these patents are not essential to complying with the MPEG-2 standard. On information and belief, such nonessential patents were added to the MPEG-2 pool only to extend the ultimate expiration date of the pool and/or to make individual licensing impracticable.

Id. However, none of these six patents support Nero's allegations of predatory conduct.

Three of these allegedly nonessential patents are part of the initial 27 patents submitted to the Department of Justice ("DOJ") in connection with its request for a Business Review Letter approving the MPEG-2 pool and, thus, were not added later to improperly extend the temporal scope of the pool. See Steinberg Decl., Ex. K*fn4 (listing U.S. Patent Nos. 4,849,812; 5,420,866; and 5,457,701 as "MPEG-2 patents to be included in the patent pool."). The other three patents also could not have been added to extend the temporal scope of the pool. The '543 patent expired in 2006. The '420 patent and the '790 patent expire in 2013. See Motion at 17 n.8. Because at least two patents in the original pool will not expire until 2014*fn5 , it is impossible that the '420, '543 or '790 patents were added to extend the duration of the MPEG-2 pool because the "new" patents expire before the original patents. Therefore, none of the six patents Nero alleges are nonessential could have been added for the anticompetitive purpose of unlawfully extending the temporal scope of the MPEG-2 pool. In that regard, Nero's allegations of predatory conduct remain entirely implausible.

Nero also alleges that MPEG LA added nonessential patents to the MPEG-2 pool to increase the cost to Nero of determining which patents it needs to practice its technology in compliance with the standard. Nero identifies six nonessential patents but does not include any factual basis or explanation of why the patents are not essential to practice the MPEG-2 standard. Nero explains only that the patents address "peripheral matters" such as encryption, transmission of multiple program streams, and digital playback. See FAC ¶ 40.

Nero contends a patent is not essential if it is possible to practice the MPEG-2 standard without infringing it. In other words, Nero contends an essential patent is a patent which is necessarily infringed in connection with the use or implementation of the MPEG-2 standard. Therefore, according to Nero's tailored theory of patent essentiality, if Nero does not need to license the patent to manufacture its product in compliance with the MPEG-2 standard, the patent is nonessential.*fn6 However, this Court has already ruled, "[i]t is not anticompetitive for a patent pool to include numerous potentially blocking patents, patents which may or may not be essential but which are more efficient to license as part of the pool than to risk the expense of future litigation." Nero AG, 2010 WL 4366448, at * 5 (citing U.S. Philips Corp. v. ITC, 424 F.3d 1179, 1187-90 (Fed. Cir. 2005)); Princo v. ITC, 563 F.3d 1301, 1310 (Fed. Cir. 2009) (finding a patent is essential if it is reasonable for a manufacturer of standard-compliant products to believe that its product infringed any of the claims in the patent), vacated on other grounds by Princo v. ITC, 583 F.3d 1380 (Fed. Cir. 2009). Nero is not entitled to a patent pool customized by MPEG LA to Nero's precise needs; direct licensing can accomplish that aim.

3.Predatory Conduct: Extension of Contract Term

Nero adds new allegations that MPEG LA has added a contractual bar to independent licensing by introducing a new Extended MPEG-2 License that contains a "five-year lock out" on licensees' right to terminate the agreement. FAC ¶ 43. A contractual agreement that contains a fixed term and no cancellation clause is not anticompetitive when entered into freely. Therefore, to bolster its claim, Nero alleges it "realistically had no choice but to sign the Extended MPEG-2 License." FAC ¶ 43.

Nero has not explained plausibly how it was coerced into entering into the new contract. Nero explains its lack of choice in two ways. First, Nero alleges-in a footnote-that the threat of being sued for infringement was a "big stick" which served to force licensees to sign the Extended MPEG-2 License. See FAC ¶ 11(c) n.3. This "coercion" is implausible because Nero could have avoided infringement litigation by directly licensing the necessary patents or perhaps even by continuing to operate under its previous license. In any event, Nero cannot possibly contend it is anticompetitive for a patentee to enforce its intellectual property rights. The Court notes, incidentally, that MPEG LA is an organization that merely administers the pool and is not alleged to own any of the patents in the pool. See, e.g.,FAC ¶ 1, 8, 12, 21, 37. Nero has not plausibly alleged that MPEG LA prevents it and other potential licensees from negotiating individual licenses with any of the patentees.

Second, Nero contends because its competitors were renewing their licenses at a lower royalty rate, Nero would have been unable to compete if it delayed its switch to the new agreement by taking time to explore direct licensing. Nero thus admits it entered into the new contract in December 2009, a full year before its existing license expired, because it wanted to take immediate advantage of the lower rates. FAC ¶¶ 11(c); 43. Nero cannot plausibly allege it was coerced into signing the Extended MPEG-2 License when it had twelve months remaining in the term of its existing license in which it could have attempted to negotiate direct licenses, but instead chose to enter into a new agreement because it placed a higher value on an immediate decrease in royalty rates.

Nero's chief complaint is that a licensee wanting to individually license the patents necessary to practice its technology has to conduct its own essentiality review of the unexpired patents. But if there were no patent pool at all, Nero would have to conduct the same inquiry. The fact that there is an option to license from a patent pool is therefore a benefit to Nero. Princo v. ITC, 563 F.3d at 1310 (recognizing patent pools are desirable because they can generate precompetitive efficiencies in the form of reduced transaction costs). Nero has not plausibly alleged that it did not have the option to license the patents individually; it has not plausibly alleged that the package licensing is a restraint of trade. See, e.g., McCullough Tool Co. v. Well Surveys, Inc., 343 F.2d 381, 409-10 (10th Cir. 1965) (distinguishing patent misuse cases in which licensees were faced with a take all or none choice from the case where "the package license was purely voluntary and a licensee who did not want the whole package could obtain a license on a reasonable basis covering any particular patent he did want.")

4.Discriminatory Conduct and Secret Side Letters

Nero adds allegations about "discriminatory conduct" and "secret side letters". FAC ¶ 49. The complaint contains no elaboration to explain the basis for these assertions.


For the reasons set forth above, the Court DISMISSES the case with prejudice. The Court will not grant Nero leave to amend because it has been given several opportunities to amend its allegations already. Nero first brought its allegations in the form of counterclaims and then amended counterclaims in an earlier suit, which eventually was remanded to state court for improper removal. In that prior suit, Nero also had the benefit of reviewing a motion to dismiss that MPEG LA filed before the case was remanded and before Nero re-filed its claims separately in federal court. Thus, the first Complaint in this case represented Nero's third attempt at stating a claim upon which relief can be granted.

The Court's prior Order explained that "the chief problem with the Complaint is that it does not contain any factual allegations to support its inferences" and gave Nero an opportunity to remedy that defect. Nero AG, 2010 WL 4366448,at *8. Nero has not succeeded. See Bonin v. Calderon, 59 F.3d 815, 845 (9th Cir. 1995) ("[W]e have held that a district court does not abuse its discretion in denying a motion to amend where the movant presents no new facts but only new theories and provides no satisfactory explanation for his failure to fully develop his contentions originally.")


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