Ritz Camera & Image Llc v. Sandisk Corp..

• Decision Date: 24 February 2011
• Docket Number: Case No. 5:10–cv–02787–JF/HRL.
• Citation: 772 F.Supp.2d 1100
• Court: U.S. District Court — Northern District of California
• Parties: RITZ CAMERA & IMAGE, LLC, a Delaware limited liability company, on behalf of itself and others similarly situated, Plaintiff,v.SANDISK CORPORATION; Eliyahou Harari, Defendants.

772 F.Supp.2d 1100

2011-1 Trade Cases P 77,378

RITZ CAMERA & IMAGE, LLC, a Delaware limited liability company, on behalf of itself and others similarly situated, Plaintiff,

v.SANDISK CORPORATION; Eliyahou Harari, Defendants.

Case No. 5:10–cv–02787–JF/HRL.

United States District Court, N.D. California,San Jose Division.

Feb. 24, 2011.

Colleen Duffy-Smith, Morgan Duffy-Smith & Tidalgo, LLP, San Jose, CA, Beverly C. Moore, Joseph S. Hall, Kfir B. Levy, Melanie L. Bostwick, Kellogg Huber Hansen Todd Evans & Figel, P.L.L.C., Robert Stephen Berry, Berry Law PLLC, Steven F. Benz, Kellogg, Huber, Hansen, Todd, Washington, DC, for Plaintiff.Raoul Dion Kennedy, David W. Hansen, James Patrick Schaefer, Skadden Arps Slate Meagher & Flom LLP, San Francisco, CA, Lara Anne Rogers, Skadden, Arps, Slate, Meagher and Flom LLC, Palo Alto, CA, for Defendants.

ORDER ¹ GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS FIRST AMENDED COMPLAINT

JEREMY FOGEL, District Judge.

I. BACKGROUND

On June 25, 2010, Plaintiff Ritz Camera & Image, LLC (“Ritz”) filed the instant action against Defendants SanDisk Corporation (“SanDisk”) and Eliyahou Harari (“Harari”), alleging violations of § 2 of the Sherman Antitrust Act, 15 U.S.C. § 2 (“Sherman Act”). Ritz filed its first amended complaint (“FAC”) as of right on August 25, 2010. On behalf of a purported class, Ritz asserts claims for conspiracy to monopolize and monopolization of the flash memory market. In particular, Ritz alleges that SanDisk and Harari conspired to monopolize and have monopolized the market for NAND flash memory products ² through the assertion of fraudulent patents. FAC ¶¶ 124–35. Ritz claims that Defendants have reduced competition in the market by pursuing unfounded actions for patent infringement and by engaging in retaliatory conduct toward consumers who use competing products. Id.

Ritz alleges that Harari tortiously converted flash memory technology owned by his former employer Wafer Scale Integration (“WSI”), which led to the issuance of U.S. Patent Nos. 5,172,338 and 5,991,517, referred to herein as the ' 338 and '517 patents or the “crown jewel patents.” ³ Id. ¶¶ 93–102, 126, 132. According to Ritz, Harari obtained these patents by intentionally failing to disclose invalidating prior art to the U.S. Patent and Trademark Office (“USPTO”) and by making affirmative misrepresentations to the USPTO. Id. ¶¶ 35–73, 126, 132. Allegedly, Harari and his newly-formed company—SanDisk—then exploited the crown jewel patents by suing competitors for infringement. Id. ¶¶ 110–122, 126, 132. Ritz also claims that Defendants threatened competitors' customers through harassing litigation and sales tactics, and retaliated against Ritz specifically by terminating their business relationship after the commencement of the instant litigation. Id.

Ritz alleges that Defendants' enforcement of the subject patents has suppressed competition in the NAND flash memory product market, as evidenced by the March 2008 market departure of SanDisk's largest competitor, STMicroelectronics, Inc. (“STM”). Id. ¶ 115. Ritz also claims that Defendants entered into an anticompetitive settlement agreement with STM in an effort to drive STM from the market. Id. ¶¶ 112–120, 126, 132. These actions allegedly have resulted in reduced market competition and a steep increase in prices for NAND flash memory. Id. ¶¶ 129, 134.

Defendants move to dismiss the FAC pursuant to Fed.R.Civ.P. 12(b)(6). They argue that Ritz (1) has failed to allege the existence of an antitrust conspiracy; (2) lacks standing to pursue a Walker Process ⁴ fraud claim; (3) lacks antitrust standing; and (4) has failed to allege a relevant antitrust market, which is a necessary predicate to any antitrust claim. Ritz opposes the motion. The Court heard oral argument on December 17, 2010. For the reasons set forth below, the motion will be granted in part and denied in part.

II. LEGAL STANDARD

“Dismissal under Rule 12(b)(6) is appropriate only where the complaint lacks a cognizable legal theory or sufficient facts to support a cognizable legal theory.” Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th Cir.2008). For purposes of a motion to dismiss, the plaintiff's allegations are taken as true, and the court must construe the complaint in the light most favorable to the plaintiff. Jenkins v. McKeithen, 395 U.S. 411, 421, 89 S.Ct. 1843, 23 L.Ed.2d 404 (1969). “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.’ A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, –––U.S. ––––, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009), Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Thus, a court need not accept as true conclusory allegations, unreasonable inferences, legal characterizations, or unwarranted deductions of fact contained in the complaint. Clegg v. Cult Awareness Network, 18 F.3d 752, 754–755 (9th Cir.1994).

Leave to amend must be granted unless it is clear that the complaint's deficiencies cannot be cured by amendment. Lucas v. Dep't of Corr., 66 F.3d 245, 248 (9th Cir.1995). When amendment would be futile, however, dismissal may be ordered with prejudice. Dumas v. Kipp, 90 F.3d 386, 393 (9th Cir.1996).

III. DISCUSSION

A. Walker Process Standing

The Court first must determine whether Ritz has standing to bring a Walker Process claim, as each of Ritz's claims is dependent upon the theory that Defendants have engaged in the enforcement of fraudulently-obtained patents. Neither the Supreme Court nor the Ninth Circuit has determined whether direct purchasers, such as Ritz, have standing to assert a Walker Process claim.⁵

Generally, Walker Process challenges are brought by competitors as counterclaims in patent infringement actions. In re DDAVP, 585 F.3d 677, 689 (2d Cir.2009). Walker Process claims reside at the junction of patent and antitrust law, allowing plaintiffs to “strip [a patent-holder] of [his] exemption from the antitrust laws” if his patent has been procured by fraud. 382 U.S. at 177, 86 S.Ct. 347. The Supreme Court's decision in Walker Process permits plaintiffs to seek damages under § 2 of the Sherman Act for “monopolistic action taken under ... fraudulent patent claim[s].” Id. at 176, 86 S.Ct. 347.

Ritz argues that because the Supreme Court did not limit its holding to a particular class of plaintiffs, direct purchasers and competitors are equally entitled to standing. Walker Process, 382 U.S. at 176, 86 S.Ct. 347. (“The gist of Walker's claim is that since [Defendant] obtained its patent by fraud it cannot enjoy the limited exception to the prohibitions of § 2 of the Sherman Act, but must answer under that section ... to those injured by any monopolistic action taken under the fraudulent patent claim.”) (emphasis added). It contends that both precedent and public policy support this interpretation. In re Netflix Antitrust Litigation, 506 F.Supp.2d 308, 316 (N.D.Cal.2007) relied on Molecular Diagnostics Laboratories v. Hoffmann–La Roche, Inc., 402 F.Supp.2d 276, 280 (D.D.C.2005) in concluding that, “[e]ven though Walker Process claims are predicated on enforcement of a fraudulently-obtained patent, the harm still accrues directly to consumers.... Accordingly, if plaintiffs can plead the other elements of their Walker Process claim, they have standing.” ⁶ Ritz maintains that the policy underlying Walker Process claims is to redress anticompetitive conduct, and that, “[i]t would be perverse to deny standing to the main targets of [such] conduct.” Opp. Br. at 21.

Defendants argue that Ritz overlooks persuasive authority holding that purchaser plaintiffs lack standing. According to Defendants, it is generally accepted that consumers lack standing to assert a Walker Process claim unless the patent at issue is “already unenforceable due to inequitable conduct.” MTD at 19 (quoting In re DDAVP, 585 F.3d 677 at 691–92); See also Kroger Co. v. Sanofi–Aventis, 701 F.Supp.2d 938 (S.D.Ohio 2010); Kaiser Foundation Health Plan, Inc. v. Abbott Laboratories, Inc., No. CV 02–2443–JFW, 2009 WL 3877513, at *4 (C.D.Cal. Oct. 8, 2009); In re K–Dur Antitrust Litigation, No. 01–1652(JAG), MDL No. 1419, 2007 WL 5297755 (D.N.J. Mar. 1, 2007); In re Ciprofloxacin Hydrochloride Antitrust Litigation, 363 F.Supp.2d 514, 542 (E.D.N.Y.2005); In re Remeron Antitrust Litigation, 335 F.Supp.2d 522 (D.N.J.2004); Asahi Glass Co. v. Pentech Pharms, Inc., 289 F.Supp.2d 986 (N.D.Ill.2003).

However, many of these cases involve issues not presented here. In Kroger, the patent at issue already had been found valid in prior litigation. 701 F.Supp.2d at 963 (“The Court is loathe to grant such an expansion of potential patent challengers by conferring standing to direct purchasers of a drug for which the patent has been judicially determined to be valid and enforceable.”). In Kaiser, the court dismissed the plaintiff's Walker Process claim because of the indirect nature of the alleged antitrust injury. 2009 WL 3877513, at *4 (“it is clear that the injury allegedly suffered by Plaintiff in its Hatch–Waxman Walker Process claim is not the type of ‘direct’ or ‘proximate’ injury that results in antitrust standing.”). Likewise, In re K–Dur, In re Ciprofloxacin, and Asahi each involved a Walker Process claim brought by an indirect purchaser. Here, Ritz is a direct purchaser of NAND flash memory, and the validity of the patents at issue has never been resolved.

The Supreme Court's decision in Walker Process places no limitation on the class of plaintiffs eligible to bring a Walker Process claim,⁷ and only one court has held expressly that a direct purchaser lacks standing to sue.⁸ Even in DDAVP, the Second Circuit declined to decide “whether...