SanDisk Streaks To Victory In Two Challenges To Its Flash-Memory Licensing Practices

A federal judge in the Northern District of California has dismissed an antitrust complaint against SanDisk Corporation, the dominant maker of computer flash memory.

In the suit, PNY Technologies, Inc. v. SanDisk Corporation, downstream competitor PNY alleged that SanDisk violated Sections1 and 2 of the Sherman Act through licensing practices of its extensive patent portfolio.

According to the complaint, SanDisk owns more than 1,400 U.S. patents, covering 100% of the technology used to manufacture or assemble flash memory – such that every single firm in the industry must pay royalties to SanDisk or face litigation.  The complaint alleged that SanDisk exploited its robust portfolio by coercing competitors to enter licensing agreements which required licensees to:

* Pay multiple royalties on the same product as it is sold along the distribution chain;

* Pay royalties on worldwide sales, regardless of whether SanDisk had patent rights;

* License a full patent portfolio, rather than specific individual patents; and

* Grant back to SanDisk a worldwide, royalty-free license to any of the licensee’s future technological innovations related to flash memory.

Judge Yvonne Gonzalez Rogers pointed to the “tension” between the legitimate rights of patent holders and ruled that the complaint failed to sufficiently explain how SanDisk dominated the market.  While granting leave to amend the complaint, the court pointed to the “overarching inadequacy” of the allegations that failed to “distinguish[] between and among the various markets and causes of action,” and the failure “at its most basic level” to relate alleged anticompetitive conduct to the “legally obtained monopoly of the patented technology.”

While the court accepted that PNY had adequately alleged monopoly power and barriers to entry in the upstream market for flash memory, the complaint failed to allege monopoly power in the downstream markets.  The court concluded that SanDisk’s power to extract a royalty on the same patented technology on all downstream market sales did not establish that SanDisk has the power to control downstream prices or competitors.

The court also found that PNY had not alleged anticompetitive conduct in the relevant markets.  As to the technology market, the complaint did not allege any willful acquisition of a monopoly.  With respect to the other downstream markets, the complaint failed to allege that SanDisk was demanding “double royalties,” as opposed to collecting separate royalties for separate patents.  And the grantback provision was not clearly anticompetitive, because PNY did not allege that the provision in fact stifled innovation.

The dismissal followed the unsealing earlier in the month of a federal court decision in the Western District of Wisconsin dismissing nearly identical claims against SanDisk after a full bench trial on the merits.  That case involved antitrust counterclaims asserted by Kingston Technologies in response to an infringement suit brought by SanDisk.  Rejecting Kingston’s claims that SanDisk’s patent licensing protocol was unfair and anticompetitive, Judge Barbara Crabb found that Kingston failed to prove “that the challenged licensing terms would have an adverse effect upon the market for USB flash drives in the United States.”