Source: http://www.ndcalblog.com/2011/05/developments-in-consumer-standing-in.html
Timestamp: 2019-04-25 10:25:17+00:00

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I recently wrote an article for the American Intellectual Property Association's (AIPLA) Antitrust Newsletter which I have included below in its entirety.
The Supreme Court held in Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965), that “the enforcement of a patent procured by fraud on the Patent Office may be violative of § 2 of the Sherman Act provided the other elements necessary to a § 2 case are present.” The Supreme Court did not specify who could assert such a claim and two views have developed on the matter. The first view finds that the Sherman Act exists to protect competitors from monopolistic practices in the market place and would only give standing to competitors who face a risk of suit for patent infringement. In re Remeron Antitrust Litigation. The second view finds that consumers can face higher prices as a result of a merchant’s fraud upon the patent office scaring off competition from the marketplace which is an injury courts may address. Ritz Camera & Image v. SanDisk. This article compares the reasoning of each approach.
As a constitutional matter, a plaintiff must have standing in order to sue. Constitutional standing exists where a plaintiff 1) suffers an injury in fact 2) which is caused by the defendant and 3) can be remedied by a favorable court decision. However, “the focus of the doctrine of ‘antitrust standing’ is somewhat different from that of standing as a constitutional doctrine. Harm to the antitrust plaintiff is sufficient to satisfy the constitutional standing requirement of injury in fact, but the court must make a further determination whether the plaintiff is a proper party to bring a private antitrust action.” Antitrust standing requires a plaintiff to show a favorable balance of five factors: "(1) the nature of the plaintiff's alleged injury; that is, whether it was the type the antitrust laws were intended to forestall; (2) the directness of the injury; (3) the speculative measure of the harm; (4) the risk of duplicative recovery; and (5) the complexity in apportioning damages." At issue in direct purchaser cases is the second element.
Walker Process claims are commonly asserted as a counterclaim to a claim of patent infringement. Courts have allowed anyone sued for infringement to have standing to counterclaim with Walker Process, even consumers. The two seminal Federal Circuit decisions involved defendants directly sued for patent infringement, rather than a plaintiff seeking declaratory judgment of invalidity or non-infringement. The sued consumers face an extremely palpable injury – infringement damages or licensing fees if they settle – which conferred them standing to raise a Walker Process claim.
To the contrary, the Supreme Court has foreclosed antitrust standing to indirect purchasers. In Illinois Brick v. Illinois the State brought an antitrust action against a concrete block manufacturer from whom it had indirectly purchased concrete blocks. In rejecting the action for lack of standing, the Supreme Court interpreted federal antitrust law to prevent indirect purchasers from seeking antitrust damages except in certain limited circumstances. Those limited circumstances have not been found in Walker Process litigation. In Relafen a set of plaintiffs sued GlaxoSmithKline alleging that it unlawfully delayed the marketing of a generic version of the anti-inflammatory drug nabumetone though suits alleging infringement of an invalid and unenforceable patent. Citing Illinois Brick, the court found that indirect purchasers had no standing and dismissed their case. However, this left the question of direct purchaser consumer standing open, and the Federal District Courts have reached different results.
The New Jersey approach is what I call the legal theory espoused by former Federal Judge Stephen Orlofsky, sitting as a special master in In re K-DUR Antitrust Litigation. Mr. Orlofsky consolidated the case law at the time and determined that the injury caused by the antitrust violation is best litigated a competitor who is the party closest to the harm.
To get there, Mr. Orlofsky begins with a litany of cases that have answered the same question, albeit differently. The first word on the matter was Judge Neal Peters McCurn in Indium Corp. of America v. Semi-Alloys, Inc.. That case involved a declaratory judgment action where the plaintiff also raised a Walker Process claim. The court extended Walker Process standing to producers who "were ready, willing, and able to produce the article and would have done so but for the exercise of exclusionary power by the defendant." However, two years later, Judge Anne E. Thompson in Carrot Components Corp. v. Thomas & Betts Corp., reached the exact opposite conclusion. Carrot Components, much like Indium, was seeking a declaratory judgment of invalidity of two of the defendant’s patents and damages under a Walker Process claim. The court ruled that with respect to declaratory judgment claims, only parties that have been directly threatened with suit or who can demonstrate that they reasonably anticipate a patent infringement suit or some effort by the patent holder to enforce the subject patent against them will have standing to bring such a claim for relief.
Next to speak on the matter was Judge Richard Posner, sitting by designation in Asahi Glass Co., Ltd. v. Pentech Pharma., Inc.. In Asahi Glass, the plaintiff was a supplier of the paroxetine, active ingredient in a generic version of the drug Paxil. Asahi sued the defendant, GlaxoSmithKline (Glaxo) in a declaratory judgment action similar to Carrot Components in an effort to have the patent for Paxil declared invalid. To show the directness of injury requirement Asahi argued that its potential customers were not purchasing its paroxetine product because they feared being sued by Glaxo. Judge Posner observed that if plaintiff's potential customers were deterred by Glaxo's threat of suit, then those customers had a cause of action against Glaxo. However, Asahi had no right to bring an action on that basis. Asahi Glass notes in dicta that direct purchasers who face suit have standing to pursue Walker Process claims, but a supplier who is not the target of a suit by a patent holder, does not have standing to bring a Walker Process claim.
Examining these factors, the court sees no reason to limit standing to competitors. While entities facing enforcement actions are more likely to rely on Walker Process, this reflects more that they are in a stronger position to detect wrongdoing than a Congressional preference. If one believes that one of the primary purposes of a treble damages action is deterrence, then increasing the number of parties scrutinizing the actions of potential monopolists will further that goal. Moreover, because direct purchasers have frequent interactions with the defendants, they have a strong incentive to discover and litigate the offense. See William H. Page, The Scope of Liability For Antitrust Violations, 37 Stan. L. Rev. 1445, 1488 (1985). Those against whom a patent is enforced, by comparison, will generally have limited contact with a defendant unless there is the suspicion of infringement.
The court ruled that direct purchasers and competitors are equally well-suited to pursue Walker Process claims against both patent holders, those whose patents are obtained through fraud or "inequitable conduct" on the PTO and those who collude with them.
Mr. Orlofsky outright rejected Judge Kennedy’s reasoning.
Against the backdrop of this case law, I conclude that Molecular Diagnostics is an isolated anomaly. The fact that the Molecular Diagnostics court found an exception to the general rule of antitrust standing in that case certainly does not mean that the "rule" has lost sway in cases where antitrust claims are based on Walker Process-type allegations.
So, does Molecular Diagnostics, “create an unnecessary  split of authority, without any compelling reason[?]” Is it really “an isolated anomaly?” The Northern District of California Court which is the subject of this author’s blog has answered that question in the negative.
The Northern California Approach is what I call the legal theory Judge William H. Alsup used to grant consumer standing in In re Netflix Antitrust Litigation. It is interesting that the Northern District would be receptive to those claims since Bourns, Inc., v. Raychem Corp. found that competitor plaintiffs who were not prepared to enter the market did not have Walker Process standing. Though, the dissent noted that the injury itself was specious, not whether Bourns was a proper plaintiff.
Nonetheless, the Northern District’s first exposure to the consumer direct purchaser standing issue was In re Netflix Antitrust Litigation. Netflix operates an online DVD rental business and has two patents that cover it – United States Patents No. 6,584,450 and 7,024,381. On April 4, 2006 Netflix sued Blockbuster for infringement of the ‘381 patent. Dennis Dilbeck tried to intervene in the action, but the court denied his request and the parties subsequently settled. Undaunted, Mr. Dilbeck filed the current action alleging a Walker Process antitrust violation based on the Blockbuster lawsuit. He claimed that the patents prevented others from entering the market and that the Blockbuster lawsuit was a sham. Judge Alsup found standing, first distinguishing Bourne on its facts since Bourne did not address consumer standing. Further, Judge Alsup found Molecular Diagnostics persuasive because some antitrust cases were arranged such that consumers were the ones with the most direct injury. Finally he found that the New Jersey cases were simply dealing with something else because those cases had better plaintiffs for the actions than the current case.
This order finds Molecular Diagnostics persuasive. Even though Walker Process claims are predicated on enforcement of a fraudulently-obtained patent, the harm still accrues directly to consumers. Competitors are excluded from the market allowing the patentee to create or maintain an unlawful monopoly.
Judge Alsup ultimately dismissed the claims for failure to plead with the particularity required by Fed. R. Civ. P. 9(b).
A few years after Netflix, the Second Circuit denied Walker Process standing to direct purchasers generally, but not consumers specifically. Subsequently, the Central District of California adopted the rule in Remeron. The issue then recently came before the Northern District of California again in Ritz Camera.
However, because viable Walker Process claims are rare, it is unlikely that many direct purchasers will be in the same position as Ritz is here. Moreover, as the Supreme Court observed in Walker Process, “the interest in protecting patentees from ‘innumerable vexatious suits’ [may not] be used to frustrate the assertion of rights conferred by the antitrust laws.” 382 U.S. at 176. Id at 7.
Further, the court notes, “because of the heightened evidentiary requirements necessary for a showing of fraud, few Walker Process claims survive summary judgment.” Id. at 6-7. Judge Fogel cites no authority for this proposition and it is unclear how obvious this statement is.
The Northern District Cases, Netflix and Ritz Camera, ask who Congress intended to protect with the antitrust statutes. They have also rekindled a debate about the scope of permissible Walker Process claims that was absent just five years ago. They have also embraced the reasoning of Molecular Diagnostics notwithstanding K-DUR’s charge that Molecular Diagnostics “is an isolated anomaly.” No other courts have been recently asked the same question and answered it in a meaningful way.
Until they do, the moral of the story for plaintiffs’ attorneys is to try to obtain venue in the Northern District of California. Similarly, defense counsel should seek venue in the District of New Jersey. Attorneys may also follow my blog (www.ndcalblog.com) for the latest developments.
 Editor of the Northern District of California Blog (www.ndcalblog.com).
 Id. at 174; Sherman Antitrust Act, 17 U.S.C. § 2.
 335 F.Supp.2d 522 (D.N.J. 2004) (Remeron) (finding a consumer as a direct purchaser does not have standing to pursue a Walker Process claim, rather it is only available as a cross-claim in a patent infringement action).
 5:10-CV-02787 (N.D. Cal. Feb. 24, 2011) (Ritz Camera) (finding a consumer does have standing to pursue a Walker Process claim in the first instance).
 Associated Gen. Contractors of Cal., Inc. v. Carpenters, 459 U.S. 519, 535 n.31 (1983).
 Amarel v. Connell, 102 F.3d 1494, 1507 (9th Cir.1996) (citing Assoc. Gen. Contractors, 459 U.S. at 535).
 Nobelpharma AB v. Implant Innovations, Inc., 141 F. 3d 1059 (Fed. Cir. 1998); Argus Chem. Corp. v.
Fibre Glass-Evercoat Co., 812 F.2d 1381 (Fed. Cir. 1987).
 431 U.S. 720, 726 (1977) (explaining that the concrete blocks pass from the manufacturer to masonry contractors and to general contractors before reaching the governmental entities).
 See e.g. In re Relafen Antitrust Litigation, 360 F.Supp.2d 166 (D. Mass. 2005) (Relafen).
 no. 01-1652 (D.N.J. Mar. 1, 2007) (K-DUR).
 Id. at 17 citing Associated General Contractors, 459 U.S. at 542.
 591 F. Supp. 608 (N.D.N.Y. 1984).
 229 U.S.P.Q. 61 (D.N.J. 1986) ("Carrot Components").
 289 F.Supp.2d 986 (N.D. Ill. 2003) ("Asahi Glass").
 Remeron, 335 F.Supp.2d at 529.
 Id.; Clayton Antitrust Act of 1914, 15 U.S.C. §§ 12-27. The Clayton Act can be used as a vehicle to enforce a Sherman Act monopolization claim, but does not create a claim in itself for fraud upon the USPTO. Walker Process, 382 U.S. at 178.
 402 F.Supp.2d 276 (D.D.C. 2005) ("Molecular Diagnostics").
 Fisher v. City of San Jose, 475 F.3d 1049, 1076 (9th Cir. 2007) (Callahan, J. dissent) overruled 558 F.3d 1069 (en banc) (2009).
 506 F.Supp.2d 308 (N.D. Cal. 2007).
 331 F.3d 704, 711-12 (9th Cir. 2003).
 Id. at 713-14 (Pregerson, J. dissenting).

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