Federal Court Finds Sprinkler Monopolization Claims To Be all Wet

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.”

Tagged in: Antitrust Litigation, Monopolization,