FALL 2008

Trade Secrets


Course No. 9200-704 (and 804)-801

ID No. 16545

MW 3:00 - 4:30 p.m.
Room L-134
Professor Jay Dratler, Jr.
Room 231D (IP Alcove)
(330) 972-7972
Copyright © 2000, 2002, 2003, 2006, 2008   Jay Dratler, Jr.   For permission, see CMI.

Questions and Notes on CVD, Inc. and Antitrust Counterclaims

1  CVD, Inc. builds upon the seminal case of Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 86 S.Ct. 347, 15 L.Ed.2d 247, (1965), which the CVD court discusses.  There the defendant in a patent-infringement suit filed an antitrust counterclaim, asserting that the plaintiff had wrongfully secured the patent, that the patent was therefore invalid, and that, by maintaining and enforcing a patent known to be invalid, the plaintiff had committed monopolization or an attempt to monopolize, in violation of Section 2 of the Sherman Act, 15 U.S.C. § 2.  Reversing dismissal of the antitrust claim below, the Supreme Court held that such a claim was viable if: (1) the patent had been secured through "fraud on the Patent Office" and (2) the other elements necessary to make out an antitrust claim were proven.  See Walker Process, supra, 382 U.S. at 174, 177-178.

2.  The antitrust claim in Walker Process was based upon what was then called "fraud on the Patent Office."  The same conduct is now called "inequitable conduct."  See In re Harita, 847 F.2d 801, 807 (Fed. Cir. 1988) (explaining history and significance of change in terminology).  As the new term suggests, this is not common-law fraud.  Rather, it is breach of the patent applicant's duty to disclose to the Patent and Trademark Office (PTO), in connection with any patent application, all known information that is material to determining whether the invention is patentable.  If the patent applicant (or the patent attorney) fails to disclose known, material information and does so with an intent to mislead the PTO, his "inequitable conduct" renders all claims of the patent unenforceable, even those that do not relate to the information withheld.  See Jay Dratler, Jr., Intellectual Property Law: Commercial, Creative, and Industrial Property, § 2.04[2][b] (Law Journal Press 1991).

In what respects does the conduct of Raytheon in CVD, Inc. resemble this type of inequitable conduct?  Does it differ in any significant respect?

3.  Successful antitrust claims invoke powerful remedies.  Every prevailing antitrust plaintiff is entitled to treble damages (i.e., to recover three times the amount of proven damages), plus reasonable attorneys' fees spent in the litigation.  See Clayton Act § 4, 15 U.S.C. § 15.  If it were easy to win antitrust counterclaims based on the mere fact that a plaintiff's intellectual property turned out to be invalid, owners of intellectual property might fear to bring questionable claims into court, in order to vindicate their intellectual property rights.  This "chilling effect" might then undermine the plaintiff's First-Amendment right of access to the courts.  See: Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 137, 81 S.Ct. 523, 5 L.Ed.2d 464 (1961) (establishing principle for legislative lobby activities); California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508, 510, 92 S.Ct. 609, 30 L.Ed.2d 642 (1972) (extending it to judicial and administrative proceedings). Therefore, in order to win an antitrust counterclaim based on someone's bringing suit, the antitrust counterclaimant has to show that the suit was "a mere sham to cover what [was] actually nothing more than an attempt to interfere directly with the business relationships of a competitor[.]"  Noerr, supra, 365 U.S., At 144.  This principle is known as the "mere sham" or Noerr-Pennington rule, after the two cases that began the line of authority. See Noerr, supra; United Mine Workers v. Pennington, 381 U.S. 657, 660-661, 670, 85 S.Ct. 1585, 14 L.Ed.2d 626 (1965).  Note that the CVD court cites the Noerr decision.

Do any specific facts in CVD, Inc. suggest that the risk of "chilling" legitimate attempts to enforce intellectual property rights is small on the facts of that case?  If so, what facts?  What more specific standard does the CVD, Inc. court require antitrust claims based on "bogus" threats to enforce trade-secret claims to meet?  Is that standard high enough to prevent the threat of such claims from discouraging owners of legitimate trade secrets from enforcing their intellectual property rights?  Do the facts in CVD actually satisfy that standard?

4.  After the CVD, Inc. decision, the Supreme Court continued to refine the "mere sham" doctrine of Noerr-Pennington.  Its most definitive pronouncement appeared in a copyright case, Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc., 508 U.S. 49, 60, 113 S.Ct. 1920, 123 L.Ed.2d 611 (1993).  There the Court ruled that, in order to constitute a "sham" under the Noerr-Pennington doctrine, a single suit must be (i) "objectively baseless," and (ii) in subjective bad faith, i.e., "an attempt to interfere directly with the business relationships of a competitor through the use of the governmental process—as opposed to the outcome of that process—as an anticompetitive weapon."  508 U.S. At 60 (Citations, internal quotation marks, and alterations omitted.)

How does the CVD court's own standard for valid antitrust counterclaims differ from this later standard, promulgated by the highest authority, the Supreme Court?  Do the facts of CVD suggest that the antitrust plaintiff there (CVD, Inc.) could have met that standard?  Why or why not?

5.  In order to prevail in an antitrust counterclaim, the defendant in a trade-secret misappropriation suit must not only prove that the trade-secret claim was objectively baseless and brought in subjective bad faith.  That is just the beginning.  That showing only gets the antitrust claim over the First-Amendment hurdle.  Then the plaintiff must also prove all the elements of the substantive antitrust offense, typically a monopolization or attempt-to-monopolize claim under Section 2 of the Sherman Act.

According to black-letter antitrust law, "[t]he offense of monopolization has two elements: ‘(1) the possession of monopoly power in the relevant market and (2) 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.'"  United States v. Microsoft Corp., 253 F.3d 34, 50 (D.C. Cir. 2001) (per curiam), quoting United States v. Grinnell Corp., 384 U.S. 563, 570-571, 86 S.Ct. 1698, 16 L.Ed.2d 778 (1966).  An attempt-to-monopolize claim has three elements: (1) a specific market to be monopolized; (2) the defendant's specific intent to monopolize that market; and (3) a "dangerous probability" of the defendant's doing so. Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 459-460, 113 S.Ct. 884, 122 L.Ed.2d 247 (1993).

Thus, both the monopolization and attempt offenses require, as an initial matter, defining the relevant market in which the alleged monopolization or attempt to monopolize took place.  What would that market be for the antitrust counterclaim be in the CVD case?  What would its geographic limits be?

After the market is defined, the antitrust counterclaimant must show that the other party either has monopoly power in it (for a monopolization offense) or a dangerous probability of achieving monopoly power and a specific intent to do so (for an attempt offense).   See Jay Dratler, Jr., Licensing of Intellectual Property, § 5.02[2][b][ii], [iii] (discussing substantive Section 2 offenses).  The assessment of market power usually begins by determining the antitrust defendant's market share in the defined market.  See id., § 5.02[2][b][i][A], [B].  A defendant with more than a 60% share of the defined market may have monopoly power, and one with more than an 80% share is likely to have it.  See id., § 5.02[2][b][ii].  Similarly, a defendant with more than a 40% market share may be liable for attempting to monopolize the defined market.  See id., § 5.02[2][b][iii].  The defendant's market share, however, is only the beginning of the analysis.  The actual effect of that market share may depend upon a number of factors relating to the nature and structure of the industry, such as the number of participant firms, barriers to entry, excess capacity, etc. See id., § 5.02[2][b][i].

Based on the facts in CVD, was Raytheon liable for monopolizing or attempting to monopolize the defined market in asserting its nonexistent trade secrets?   If so, what was the conduct element of the offense— i.e., the act by which Raytheon sought to entrench or extend its monopoly power over the defined market, or by which it demonstrated a specific intent to acquire monopoly power and a dangerous probability of doing so?

6.  As both the decision and these Notes show, antitrust counterclaims are not easy to win.  The First-Amendment bar is made deliberately high, in order to prevent antitrust counterclaims from "chilling" attempts by intellectual property owners to vindicate their legitimate rights in court.  Then, even after the First-Amendment hurdle is surmounted, the plaintiff has all the usual difficulty of proving a defined market and defendant's anticompetitive behavior in it.

For these reasons, antitrust claims are not to be lightly brought.  Indeed, the First-Amendment "threshold" standard is sufficiently close to the Rule 11 frivolousness standard to raise the question whether an antitrust claim that fails the two-part test of Professional Real Estate Investors might not merit Rule 11 sanctions.  Nevertheless, in a proper case, as in CVD, an antitrust counterclaim can be a powerful remedy for an opponent's wrongful and anticompetitive assertions of nonexistent intellectual property.

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