Philips North America LLC v. Advanced Imaging Services, Inc. ( 2022 )

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 EASTERN DISTRICT OF CALIFORNIA 10 11 PHILIPS NORTH AMERICA LLC, No. 2:21-cv-00876-JAM-AC 12 Plaintiff, 13 v. ORDER DENYING PLAINTIFF’S MOTION TO DISMISS DEFENDANTS’ 14 ADVANCED IMAGING SERVICES, COUNTERCLAIMS INC., d/b/a ADVANCED IMAGING 15 PARTS; and WANG XIUYUAN, a/k/a SEAN WANG, 16 Defendants. 17 ADVANCED IMAGING SERVICES, 18 INC., d/b/a ADVANCED IMAGING PARTS, 19 Counter-Claimant, 20 v. 21 PHILIPS NORTH AMERICA LLC, 22 Counter-Defendant. 23 24 This case involves a dispute between a manufacturer of 25 medical equipment, Philips North America LLC (“Philips” or 26 “Plaintiff”), and a business that contracts with hospitals and 27 clinics to repair and maintain that equipment, Advanced Imaging 28 Services (“Advanced”). See Compl. ¶¶ 1-2, ECF No. 1. After 1 Philips updated its software to require login credentials to 2 access the equipment’s systems, Advanced allegedly acquired a 3 false or unauthorized login to continue servicing this equipment. 4 Id. ¶¶ 34-41. Philips then brought this action against Advanced 5 and Sean Wang, Advanced’s employee that allegedly used the false 6 login credentials (collectively “Defendants”). Advanced and Wang 7 subsequently filed counterclaims against Philips for violation of 8 the Sherman Antitrust Act, copyright misuse, and violation of 9 California’s Unfair Competition Law. Defs.’ Countercls., ECF No. 10 91. Philips now moves to dismiss those counterclaims. Pl.’s 11 Mot. to Dismiss Countercls. (“Mot.”), ECF No. 96.1 12 13 I. FACTUAL ALLEGATIONS AND PROCEDURAL BACKGROUND 14 The parties are intimately familiar with the material facts 15 and allegations of this case. The Court does not repeat them 16 here. 17 Philips’s Complaint against Advanced and Sean Wang, contained 18 seven claims: (1) violation of the Computer Fraud and Abuse Act; 19 (2) violation of California’s Comprehensive Data Access and Fraud 20 Act; (3) violation of the Digital Millennium Copyright Act; 21 (4) violation of the Defend Trade Secrets Act; (5) violation of 22 California’s Uniform Trade Secrets Act; (6) violation of 23 California’s Unfair Trade Practices Act; and (7) Fraud. Compl. 24 Advanced and Wang moved to dismiss the first, second, fourth, 25 fifth, and seventh causes of action. Defs.’ Mot. to Dismiss, ECF 26 27 1 This motion was determined to be suitable for decision without oral argument. E.D. Cal. L.R. 230(g). The hearing was scheduled 28 for February 15, 2022. 1 No. 37. The Court granted this request as to the seventh claim 2 for fraud but declined to dismiss the other claims. Order 3 Granting in Part and Denying in Part Defs.’ Mot. to Dismiss, ECF 4 No. 86. Thereafter, Advanced and Wang answered and asserted 5 counterclaims against Philips for (1) monopolization in violation 6 of Section 2 of the Sherman Antitrust Act; (2) attempted 7 monopolization in violation of Section 2 of the Sherman Antitrust 8 Act; (3) a claim for declaratory relief of copyright misuse; and 9 (4) violation of California’s Unfair Competition Law. 10 Countercls. Philips now moves to dismiss these counterclaims. 11 Mot. Advanced and Wang opposed this motion. Defs.’ Opp’n to 12 Mot. to Dismiss Countercls. (“Opp’n”), ECF No. 100. Philips 13 replied. Philips’ Reply, ECF No. 101. For the reasons set forth 14 below, this motion is denied. 15 16 II. OPINION 17 A. Legal Standard 18 Dismissal is appropriate under Rule 12(b)(6) of the Federal 19 Rules of Civil Procedure when a plaintiff’s allegations fail “to 20 state a claim upon which relief can be granted.” Fed. R. Civ. 21 P. 12(b)(6). “To survive a motion to dismiss a complaint must 22 contain sufficient factual matter, accepted as true, to state a 23 claim for relief that is plausible on its face.” Ashcroft v. 24 Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks and 25 citation omitted). While “detailed factual allegations” are 26 unnecessary, the complaint must allege more than “[t]hreadbare 27 recitals of the elements of a cause of action, supported by mere 28 conclusory statements.” Id. “In sum, for a complaint to 1 survive a motion to dismiss, the non-conclusory ‘factual 2 content,’ and reasonable inferences from that content, must be 3 plausibly suggestive of a claim entitling the plaintiff to 4 relief.” Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 5 2009). 6 /// 7 B. Analysis 8 1. Section 2 of the Sherman Act 9 “Section 2 of the Sherman Act prohibits monopolies, 10 attempts to form monopolies, as well as combinations and 11 conspiracies to do so.” Image Tech. Servs., Inc. v. Eastman 12 Kodak Co., 125 F.3d 1195, 1202 (9th Cir. 1997) (citing 15 U.S.C. 13 § 2). “Simply possessing monopoly power and charging monopoly 14 prices does not violate § 2; rather, the statute targets the 15 willful acquisition or maintenance of that power as 16 distinguished from growth or development as a consequence of a 17 superior product, business acumen, or historic accident.” Pac. 18 Bell Tel. Co. v. linkLine Commc’n., Inc., 555 U.S. 438, 447-48 19 (2009) (internal quotation marks and citation omitted). 20 “Whereas § 1 of the Sherman Act targets concerted 21 anticompetitive conduct, § 2 targets independent anticompetitive 22 conduct.” FTC v. Qualcomm Inc., 969 F.3d 974, 989-90 (9th Cir. 23 2020). 24 “There are three essential elements to a successful claim 25 of Section 2 monopolization: (a) the possession of monopoly 26 power in the relevant market; (b) the willful acquisition or 27 maintenance of that power; and (c) causal ‘antitrust’ injury.” 28 Allied Orthopedic Appliances Inc. v. Tyco Health Care Grp. LP, 1 592 F.3d 991, 998 (9th Cir. 2010) (internal quotation marks and 2 citation omitted). To state a claim for attempted 3 monopolization, the plaintiff must allege “(1) that the 4 defendant engaged in predatory or anticompetitive conduct with 5 (2) a specific intent to monopolize and (3) a dangerous 6 probability of achieving monopoly power.” Kaiser Found. Health 7 Plan, Inc. v. Abbott Labs., Inc., 552 F.3d 1033, 1044 (9th Cir. 8 2009) (internal quotation marks and citation omitted). 9 a. Monopoly Power in the Relevant Market 10 “Plaintiff must plead a relevant market to state an 11 antitrust claim under the Sherman Act[.]” Hicks v. PGA Tour, 12 Inc., 897 F.3d 1109, 1120 (9th Cir. 2018). “The relevant market 13 is the field in which meaningful competition is said to exist” 14 which is generally defined in terms of product and geography. 15 Kodak, 125 F.3d at 1202. The “outer boundaries” of such a 16 market are determined by “the reasonable interchangeability of 17 use or the cross-elasticity of demand between the product itself 18 and substitutes for it.” Brown Shoe Co. v. United States, 370 19 U.S. 294, 325 (1962). “As such, the relevant market must 20 include the group or groups of sellers or producers who have 21 actual or potential ability to deprive each other of significant 22 levels of business.” Newcal Indus., Inc. v. Ikon Office Sol., 23 513 F.3d 1038, 1045 (9th Cir. 2008) (internal quotation marks 24 and citation omitted). 25 What constitutes the “relevant market” is typically a 26 factual rather than legal inquiry. Id. However, “there are 27 some legal principles that govern the definition of an antitrust 28 relevant market, and a complaint may be dismissed under Rule 1 12(b)(6) if the complaint’s relevant market definition is 2 facially unsustainable.” Hicks, 897 F.3d at 1120 (internal 3 quotation marks and citation omitted). 4 Advanced defines the relevant market as “the market for the 5 provision of maintenance, service, and repair on Philips’ CT and 6 MRI machines in the United States.” Countercls. ¶ 31. Philips 7 contends that this market is facially unsustainable warranting 8 dismissal. Mot. at 8. 9 First, Philips argues that “[Advanced] fails to plead 10 sufficient facts that would divorce the Philips-only service 11 aftermarket from the actual, real-world competition that occurs 12 between the various manufacturers of CT and MRI systems.” Id. 13 Because there are three other major manufacturers of CT and MRI 14 equipment – Toshiba, GE, and Siemens – Philips contends the 15 relevant market should include servicing of these brands as 16 well. Id. at 8-10. 17 The Supreme Court’s decision in Kodak is instructive here. 18 In that case independent service organizations that serviced 19 Kodak copying and micrographic equipment brought suit against 20 Kodak under the Sherman Act after Kodak implemented policies 21 that made it more difficult for ISOs to acquire Kodak parts. 22 Eastman Kodak Co. v. Image Tech. Servs., 504 U.S. 451, 455-58 23 (1992). Kodak argued that a single brand of product or service 24 can never constitute the relevant market under the Sherman Act. 25 Id. at 481. The Supreme Court disagreed finding that a single- 26 brand aftermarket for parts and service of Kodak equipment could 27 arise once customers had purchased and were “locked in” to Kodak 28 equipment. Id. at 477-482. The Court reasoned that “[b]ecause 1 service and parts for Kodak equipment are not interchangeable 2 with other manufacturers’ service and parts, the relevant market 3 from the Kodak equipment owner’s perspective is composed of only 4 those companies that service Kodak machines.” Id. at 482. 5 This is exactly what Advanced alleges here — a derivative 6 aftermarket in servicing Philips equipment. As in Kodak, 7 Philips made this change after the sale of the primary good, 8 when purchasers were “locked in”. See id. at 476-77. Thus, 9 these purchasers could not have had information about the 10 restricted aftermarket at the time of purchase. See Oracle Am., 11 Inc. v. Terix Comput. Co., Inc., No. 5:13-cv-03385-PSG, 2014 WL 12 5847532, at *6 (N.D. Cal. Nov. 7, 2014) (“Certainly these 13 customers who had purchased Solaris products before the merger 14 could not have consented to the alleged restrictive aftermarket 15 because at the time it did not exist.”). Because service for 16 Philips’s equipment is not interchangeable with other 17 manufactures’ service, the relevant market from the Philips 18 equipment owner’s perspective is composed of only those 19 companies that service Philips machines. See Kodak, 504 U.S. at 20 482. 21 Nor is the Court persuaded by Philips’ argument that the 22 market is facially unsustainable since it contains two types of 23 machines. Mot. at 11. Market realities may warrant a single 24 market for both. See Kamakahi v. Am. Soc. for Reprod. Med., No. 25 C 11-01781 SBA, 2013 WL 1768706, at *10 (N.D. Cal. Mar. 29, 26 2013) (“Because market definition is a deeply fact-intensive 27 inquiry, courts hesitate to grant motions to dismiss for failure 28 to plead relevant product market.”). If not, Advanced may 1 proceed on a theory that Philips holds monopolies over two 2 relevant service markets, as the ISOs did in Kodak. See Kodak, 3 125 F.3d at 1203 (“the ISOs proceeded on the theory that Kodak 4 held monopolies over two relevant parts markets: the Kodak 5 photocopier parts market and the Kodak micrographic parts 6 market.”). Accordingly, Philips has failed to show the relevant 7 market alleged by Advanced is facially unsustainable. 8 Advanced has also sufficiently alleged Philips has monopoly 9 power in this market. The existence of monopoly power 10 “ordinarily is inferred from the seller’s possession of a 11 predominant share of the market.” Kodak, 504 U.S. at 464. 12 “Where such an inference is not implausible on its face, an 13 allegation of specific market share is sufficient, as a matter 14 of pleading, to withstand a motion for dismissal.” Hunt-Wesson 15 Foods, Inc. v. Ragu Foods, Inc., 627 F.2d 919, 925 (9th Cir. 16 1980). Advanced alleges that Philips has a 90 percent market 17 share. Countercls. ¶ 35. This is sufficient to overcome a 18 motion to dismiss. See Actividentity Corp. v. Intercede Grp. 19 PLC, No. C 08-4577 VRW, 2009 WL 8674284, *4 (N.D. Cal. Sept. 11, 20 2009) (finding allegations that the party had approximately 90% 21 of the market were sufficient to allege monopoly power). 22 b. Anticompetitive Conduct 23 “To safeguard the incentive to innovate, the possession of 24 monopoly power will not be found unlawful unless it is 25 accompanied by an element of anticompetitive conduct.” Verizon 26 Commc’ns. Inc v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 27 398, 407 (2004). The conduct element requires “the use of 28 monopoly power to foreclose competition, to gain a competitive 1 advantage, or to destroy a competitor.” Kodak, 125 F.3d at 1208 2 (internal quotation marks omitted). “Anticompetitive conduct is 3 that which is without a legitimate business purpose that makes 4 sense only because it eliminates competition.” Sambreel 5 Holdings LLC v. Facebook, Inc., 906 F.Supp.2d 1070, 1081 (S.D. 6 Cal. 2012). 7 Advanced alleges that Philips engaged in anticompetitive 8 conduct by limiting access to the machine’s operating menu, 9 operating systems, and diagnostic software, which effectively 10 blocked all ISOs, including Advanced, from competing with 11 Philips in the service market for these machines. Countercls. 12 ¶¶ 15-18. “Specifically, Philips unrolled a series of firmware 13 updates to its imaging equipment that, for the first time, 14 imposed a new log-in screen that blocks anyone without Philips 15 access credentials from accessing any part of the equipment’s 16 operating menu, operating systems, or diagnostic software.” Id. 17 ¶ 17. This prevented Advanced, and other ISOs, from servicing 18 the equipment. Id. ¶ 18. 19 Philips contends that these allegations are insufficient to 20 demonstrate anticompetitive conduct. Mot. at 12-14. Philips 21 argues that it has no duty to aid Advanced, its competitor, by 22 licensing their software. Mot. at 12-14. This, however, 23 misconstrues Advanced’s claim. Advanced’s theory of 24 anticompetitive conduct is not that Philips refused to deal with 25 Advanced and grant it a license. Opp’n at 12. Rather, the 26 anticompetitive conduct alleged is the implementation of this 27 new technological barrier for the sole purpose of preventing 28 ISOs access. Id. Philips responds that it has a “right to 1 develop the security features of its intellectual property via 2 firmware updates.” Mot. at 14. At this stage though, the Court 3 must accept as true Advanced’s factual allegations and view them 4 in the light most favorable to Advanced. See Mansarket v. St. 5 Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 6 2008). Advanced has alleged that Philips had no legitimate 7 business reason for this update and did so only to limit 8 competition in the service market. Countercls. ¶ 30. This is 9 sufficient to allege anticompetitive conduct. See Epicor 10 Software Corp. v. Alt. Tech. Sols., Inc., No. SACV 13-00448-CJC 11 (RNBx), 2013 WL 3930545, at *3 (C.D. Cal. June 21, 2013) 12 (finding allegations that Epicor coerced customers into using 13 only Epicor authorized partners to provide service for the ERP 14 Platform without any valid business reason sufficient to plead 15 anticompetitive conduct). 16 Accordingly, the Court denies Philips’ motion to dismiss 17 Advanced’s monopolization and attempted monopolization claims. 18 2. Copyright Misuse 19 “Copyright misuse is a judicially crafted affirmative 20 defense to copyright infringement [. . .]” Apple Inc. v. 21 Psystar Corp., 658 F.3d 1150, 1157 (9th Cir. 2011). Courts have 22 also allowed it to be asserted as an affirmative claim for 23 declaratory relief. See Apple Inc. v. Psystar Corp., No. C 08- 24 03251 WHA, 2009 U.S. Dist. LEXIS 14370, at *8 (N.D. Cal. Feb 6, 25 2009). The “purpose of the defense” is to “prevent[] holders of 26 copyrights from leveraging their limited monopoly to allow them 27 control of areas outside the monopoly.” Apple, 658 F.3d at 1157 28 (internal quotation marks and citation omitted). The doctrine 1 “does not prohibit using conditions to control use of 2 copyrighted material, but it does prevent copyright holders from 3 using the conditions to stifle competition.” Id. at 1159. The 4 Ninth Circuit has “applied the doctrine sparingly.” Id. at 5 1157. 6 Philips, relying on Triad Systems Corporation v. 7 Southeastern Express Company, 64 F.3d 1330 (9th Cir. 1995), 8 argues Advanced has failed to state a claim for copyright 9 misuse. Mot. at 4. In Triad, the plaintiff designed computers 10 for use in the automotive industry and licensed unique 11 diagnostic software to service those computers. Id. at 1333. 12 The defendant was an independent service organization that 13 serviced Triad computers. Id. Triad sued the defendant for 14 copyright infringement based on its unauthorized use of their 15 diagnostic software. Id. The Ninth Circuit rejected 16 defendant’s copyright misuse claim because “Triad did not 17 attempt to prohibit [the defendant] or any other [independent 18 service organization] from developing its own service software 19 to compete with Triad.” Id. at 1337. Philips argues that 20 Advanced fails to state a claim for misuse as it does not allege 21 “Philips conditions licensure of its copyrights on terms that 22 prevent [Advanced] or anyone else from developing, offering, or 23 using software (i.e. diagnostic software) that competes with 24 Philips’.” Mot. at 5. 25 Philips again misconstrues Advanced’s claim. Advanced’s 26 misuse claim is not premised on Philips’ failure to issue it a 27 license to its software or placing conditions on its licenses. 28 Opp’n at 14. Rather, Advanced alleges that Philips has 1 “leveraged the limited monopoly granted by its copyrights on 2 certain aspects of its software in order to restrict access to 3 all systems in its CT and MRI machines – whether legitimately 4 protected or not.” Opp’n at 13. In other words, Advanced 5 alleges that Philips locked Advanced and other ISOs out of its 6 systems in order to prevent competition in the servicing market 7 under the guise of protecting their copyrighted material. Thus, 8 Advanced claims Philips leveraged its limited monopoly on its 9 diagnostic software to control an area outside this monopoly — 10 the ability to service Philips machines. Unlike in Triad, this 11 would prevent the ISOs from developing their own servicing 12 software to compete with Philips, as such software would be 13 useless without access to the systems to use it. This is 14 sufficient to state a claim of copyright misuse. See Omega S.A. 15 v. Costco Wholesale Corp., 776 F.3d 692, 705 (9th Cir. 2015) 16 (Wardlaw, J., concurring) (noting that if Apple placed a few 17 lines of programming code from its copyrighted software onto a 18 piece of computer hardware that was not entitled to intellectual 19 property protection, with the express purpose of using its 20 copyright to restrict competing retailers from selling that 21 hardware at discounted prices, that would constitute copyright 22 misuse); see also Philips N. Am., LLC v. Summit Imaging Inc., 23 No. C19-1745-JLR, 2020 WL 6741966, at * 8 (W.D. Wash. Nov. 16, 24 2020) (finding ISO had stated a copyright misuse claim by 25 alleging Philips enforced its copyrights with the intent to 26 exclude competition in the market for service and repairs). As 27 such, the Court declines to dismiss Advanced’s copyright misuse 28 counterclaim. 1 3. Noerr-Pennington Doctrine 2 The Noerr-Pennington doctrine derives from the First 3 Amendment’s guarantee of “the right of the people [. . .] to 4 petition the Government for a redress of grievances.” U.S. 5 Const. amend. I. “Under the Noerr-Pennington doctrine, those 6 who petition any department of the government for redress are 7 generally immune from statutory liability for their petitioning 8 conduct.” Sosa v. DIRECTV, Inc., 437 F.3d 923, 929 (9th Cir. 9 2006). “However, where a party engages in ‘sham’ petitioning, 10 Noerr-Pennington immunity does not apply.” Meridian Project 11 Sys., Inc. v. Hardin Const. Co., LLC, 404 F.Supp.2d 1214, 1220 12 (E.D. Cal. 2005). “The ‘sham’ litigation exception exempts from 13 Noerr-Pennington immunity activity ‘ostensibly directed toward 14 influencing governmental action’ that ‘is a mere sham to cover 15 [. . .] an attempt to interfere directly with the business 16 relationships of a competitor.’” Id. (quoting E. R.R. 17 Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 18 127, 144 (1961)). 19 Philips reliance on the Noerr-Pennington doctrine does not 20 alter the Court’s analysis. Philips has “not done it justice by 21 making what is effectively a passing reference to it in their 22 briefs, and the Court declines to take it up in that 23 underdeveloped form.” Shen v. Albany Unified Sch. Dist., 3:17- 24 cv-02478-JD, 2018 WL 4053482, at *4 (N.D. Cal. Aug. 24, 2018). 25 Philips bears the burden on its motion to dismiss, and it has 26 failed to carry it here. Estate of Osuna v. Cty. of Stanislaus, 27 392 F.Supp.3d 1162, 1179 (E.D. Cal. 2019) (finding defendant’s 28 insufficient briefing on an issue did not support dismissal). nee nn ee EO IE ONE I 1 4, California Unfair Competition Law 2 The parties agree Advanced’s California Unfair Competition 3 Law (“UCL”) counterclaim is dependent on, and correlates, with 4 the federal claims. See Mot. at 15; Opp’n at 15. Because 5 Advanced’s federal counterclaims survive, so too does the UCL 6 counterclaim. See Sidibe v. Sutter Health, No. 12-cv-04854, 7 2021 WL 879875, at *10 (N.D. Cal. Mar. 9, 2021) (“The UCL claim 8 survives to the extent that the underlying claims survive.”). 9 10 Til. ORDER 11 For the reasons set forth above, the Court DENIES Philips’ 12 | Motion to Dismiss Defendants’ counterclaims. 13 IT IS SO ORDERED. 14 Dated: April 15, 2022 15 kA 16 teiren staves odermacr 7008 17 18 19 20 21 22 23 24 25 26 27 28 14