A federal court has decided that Digital Sun’s wireless sprinkler system may be innovative, but its claims of anticompetitive conduct by competitor Toro Company are all wet.

Judge Lucy Koh of the U. S. District Court for the Northern District of California has ruled that that Digital Sun’s antitrust complaint in Digital Sun v. The Toro Company falls well short of pleading standards, and dismissed all claims without oral argument.  Digital Sun, a small Silicon Valley startup that invented and markets a wireless sprinkler system, sued Toro, a worldwide manufacturer of outdoor maintenance equipment and associated products with 2010 net sales of $1.69 billion, for attempted monopolization of the wireless sprinkler market under Section 2 of the Sherman Act, unfair competition under California law, and fraud.

The grounds for this lawsuit can be traced to a proposed deal for Toro to take over Digital Sun.  During negotiations, Toro made a series of loans to Digital Sun and, in return, Digital Sun granted patent licenses (one exclusive license and one nonexclusive license) to its wireless sprinkler technologies to Toro.  When negotiations fell apart, Digital Sun filed this action after it realized that Toro now had patent rights to Digital Sun’s only product line.

In its complaint, Digital Sun alleged that Toro attempted to monopolize the wireless sprinkler market by engaging in bad faith negotiations to take over Digital Sun when all Toro really wanted was patent licenses for Digital Sun’s technologies.

Judge Koh found that Digital Sun failed to sufficiently allege its monopolization claim, including its allegations that Toro possessed market power and engaged in anticompetitive conduct.  The court observed that Digital Sun made no allegations of market share in its complaint other than ownership of patent rights in a particular type of wireless sprinkler technology.  In addition, Digital Sun acknowledged Toro did not hold Digital Sun’s patent rights in their entirety, and the license agreements actually created another competitor in most fields of use.  According to Judge Koh, these facts, as pled, could not give rise to findings of market power or anticompetitive conduct.

The court also found that Digital Sun did not sufficiently plead anticompetitive injury.  Despite the plaintiff’s allegations of bad faith negotiations by Toro, Judge Koh pointed out that Digital Sun was never forbidden from selling its product and was free to negotiate with other potential buyers.  Moreover, in the fields that Digital Sun cannot sell because of Toro’s exclusive license, Toro has simply replaced Digital Sun as the monopolist and, accordingly, the competitive landscape was unchanged.

The claims for unfair competition under California law and fraud likewise failed to pass muster.

This case showcases the challenges plaintiffs face when pleading patent-based antitrust claims, especially under the heightened pleading requirements of Twombly and its progeny.  Nevertheless, Judge Koh allowed Digital Sun to file an amended complaint to cure the pleading defects but cautioned the plaintiff that its “own arguments leave the Court with doubts as to whether these claims can be resurrected.”

Judge Lawrence Piersol of the U.S. District Court for South Dakota has denied a motion by TCF National Bank to preliminarily enjoin the enforcement of anticipated regulations regarding debit card interchange fees.  TCF has appealed the denial of the preliminary injunction to the Eighth Circuit Court of Appeals and has asked for expedited briefing and argument.

The judge took under advisement a motion by the U.S. Department of Justice to dismiss the litigation – with the court anticipating further briefing on the motion after the Federal Reserve issues final rules pursuant to the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The Federal Reserve is expected to issue those final rules before July 21, 2011.

TCF National Bank, a unit of Minneapolis-based TCF Financial, filed a complaint last October claiming that the Durbin Amendment was unconstitutional.  TCF’s complaint seeks a declaratory judgment that no set of regulations the Board could adopt could pass constitutional muster.

TCF moved for a preliminary injunction, and was supported by amicus briefs filed by financial institutions.  The DOJ, representing the Federal Reserve and the Comptroller of the Currency, opposed the motion for a preliminary injunction and moved to dismiss TCF’s complaint on the merits.  The Government’s position was supported by amicus briefs filed by merchant and consumer groups.

Constantine Cannon has filed an amicus brief on behalf of the Retail Litigation Center.

An antitrust suit by customers seeking to untangle services provided by their cable company, Insight Communications, has been given a green light by Judge Joseph McKinley of the U. S. District Court for the Western District of Kentucky, who denied a motion to dismiss.

The customers allege that Insight illegally ties two separate products – its interactive cable service and the rental of a set-top box.  The court’s decision rejected Insight’s arguments about the technological linkage between the service and the box, and about FCC regulations trumping the Sherman Act.

Insight’s “Interactive Premium Cable” is available only to subscribers who lease a proprietary set-top box from Insight.  Customers claimed that, were it not for Insight’s preventing its service from working with other hardware, set-top boxes could be available in stores in a competitive market, in the same way that modems and telephones are.  They claimed that by requiring customers to lease the box as a condition of receiving the cable service, Insight had “tied” the two products in violation of Section 1 of the Sherman Act.

The court decided that, based on the customers’ allegations, the service and the box could be separate products – one of the requirements for a tying claim – even though the box is useless without the service.  Customers’ perception of the two as separate products, not their technological linkage, was the controlling factor, said the court.

Another requirement for a tying claim is that the defendant have enough market power to coerce customers into buying the two products together.  The court found that interactive cable service, which includes features like “on-demand programming, the interactive user guide, and pay-per-view,” was a separate product market, because satellite TV does not provide these features, and Web-based video has a much smaller library of shows.  The court concluded that no substitutes for interactive cable existed in the Kentucky, Indiana, and Ohio cities where Insight has service.  The customers alleged that the price of Insight’s interactive cable has increased three times faster than inflation, and that Insight has no close competitors to constrain its price.  This was enough to convince the court that Insight could have power to coerce tying.

Insight also claimed that because the Federal Communications Commission has detailed rules about how cable boxes are to be provided and priced, an antitrust decision by a court could conflict with the FCC’s policy judgment.  Insight cited to Verizon Communications v. Law Offices of Curtis V. Trinko, in which the Supreme Court dismissed a claim that FCC rule violations were also antitrust violations.  The Kentucky court ruled that Trinko did not apply to cases dealing with “established antitrust standards” and did not bar the customers’ suit.

The U.S. Department of Justice and the FTC have issued a Proposed Statement of Antitrust Enforcement Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program.

The Proposed Statement was made on the same day that the United States Department of Health and Human Services, Centers for Medicare and Medicaid Services, filed its proposed rule regarding Medicare Shared Savings Program Accountable Care. 

The Proposed Statement contains provisions regarding an “Antitrust Safety Zone” for certain Accountable Care Organizations (“ACOs”), defines an expedited review process for ACO antitrust clearance, and identifies materials that must be submitted to the DOJ or FTC in order to receive an expedited review.

The Proposed Statement applies only to groups of competitors formed after March 23, 2010, to participate in the Shared Savings Programs.  The Proposed Statement is also inapplicable to mergers, which will continue to be evaluated under the Horizontal Merger Guidelines of the federal agencies.

Public comments on the Proposed Statement are due by May 31, 2011.

Judge James Ware of the U.S. District Court for the Northern District of California has denied the summary judgment motions of several car insurers in a class action alleging they created a sham organization to eliminate competition in the market for repair parts. 

The plaintiffs in Perez et al. v. State Farm Mutual Automobile Insurance Co. et al. (No. 5:06-cv-01962) are California automobile insurance policyholders who allege that defendant car insurers set up the Certified Automotive Parts Association to provide inferior replacement parts in violation of California’s Cartwright Act and Unfair Competition Law.  Plaintiffs also allege that the insurers unlawfully conspired to stifle competition in the auto repair market by agreeing to offer exclusively policies that provide inferior repair parts and to exclude other insurance companies. 

The original complaint was filed in 2006, and a third amended complaint was filed in November 2010.  Defendants argued that the amended complaint should be dismissed because the plaintiffs did not meet the Twombly standard to establish a conspiracy.  Judge Ware disagreed and held that the facts, if taken as true, were sufficient to show that the insurers conspired to eliminate competition for auto parts.

The defendants include State Farm Mutual Automobile Insurance Company, Geico General Insurance Company, Liberty Mutual Fire Insurance Company, and Allstate Insurance.