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Broadcom Disparages Monopolization By Disparagement Claim As Just Words

Posted  February 18, 2010

Sticks and stones may break your bones, but disparagement will hardly ever monopolize your market, is the message of Broadcom Corporation’s motion to dismiss a “monopolization-by-disparagement” case brought by its competitor Emulex Corporation.

The case, Emulex Corp. et al. v. Broadcom Corp. et al., No. SACV 09-1310 JVS (ANx), centers on statements Broadcom allegedly made during a 2009 attempt at a hostile takeover of Emulex, a competing communications technology company. Broadcom allegedly accused Emulex of “underperformance” and “unsatisfactory results” (among other shortcomings), and advised customers not to buy Emulex products.

This antitrust complaint, which Emulex filed in the Central District of California in November 2009, is Emulex’s third effort to recover for Broadcom’s statements. Its first effort was a complaint in California Superior Court alleging common law fraud and interference with contractual relations. Its second effort was a previous complaint in the Central District of California, alleging violations of the Securities Act. Emulex dismissed those cases when Broadcom withdrew its tender offer.

Emulex’s current complaint alleges that Broadcom’s disparaging comments were made in order to monopolize an alleged market for a certain type of Ethernet controller in violation of Section 2 of the Sherman Act.

On February 4, 2010, Broadcom moved to dismiss Emulex’s complaint, arguing that the alleged disparagement does not constitute an antitrust violation. Broadcom argues that “[c]ompetitors are expected to say negative things about one another, and thus, in antitrust there is an especially strong policy . . . that the remedy for allegedly offensive speech is ‘more speech.’” Broadcom notes that in some circuits, like the Seventh, disparagement is never an antitrust violation.

Emulex’s case, however, is the Ninth Circuit, which is somewhat more forgiving but not much. Under American Professional Testing Service v. Harcourt Brace Jovanovich Legal & Professional Publication, Inc., 108 F.3d 1147 (9th Cir. 1997), disparaging comments by competitors are protected under a presumption that, unless they pass a six-prong test, they do not cause sufficient injury to competition to violate the antitrust laws. Specifically, the statements must be (1) false, (2) material, (3) likely to induce reasonable reliance, (4) made to buyers who lack knowledge of the subject matter, (5) for prolonged periods, and (6) not reasonably susceptible to neutralization. 108 F.3d at 1152.

Broadcom argues that Emulex’s complaint fails the Harcourt Brace test, and therefore must be dismissed. Broadcom asserts that Emulex fails the third and fourth prongs of reliance and lack of knowledge because “[t]o suggest that stock analysts, technology journalists and ‘industry insiders’ would blindly rely on [Broadcom’s] position . . . discounts reality.” Broadcom also asserts that Emulex fails the final prong – neutralization – because Emulex could easily have neutralized Broadcom’s alleged statements by “educating the market about [Emulex’s] capabilities.” And Broadcom claims that Emulex fails to allege that the statements were provably false or made over a sufficiently long period of time.

Whether the Ninth Circuit will agree with Broadcom remains to be seen. Oral argument on Broadcom’s motion is scheduled for May 17, 2010.

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