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DSM Desotech Inc. v. 3D SYstems Corp.

January 26, 2009

DSM DESOTECH INC., PLAINTIFF,
v.
3D SYSTEMS CORPORATION AND 3D SYSTEMS, INC., DEFENDANTS.



The opinion of the court was delivered by: Judge Joan H. Lefkow

MEMORANDUM OPINION AND ORDER

This case arises out of an eight-count complaint filed by plaintiff, DSM Desotech, Inc. ("Desotech"), against defendants, 3D Systems Corporation and 3D Systems, Inc. (collectively, "3DS"), for violations of federal antitrust law, state antitrust law, state tort law, and federal patent law. Before the court is 3DS's motion to dismiss Counts I through VII of Desotech's complaint, the antitrust and state law claims, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons set forth below, 3DS's motion to dismiss [#29] will be granted in part and denied in part.

BACKGROUND

3DS is a manufacturer of large-frame stereolithography ("SL") machines. SL is a process by which a physical object, such as a model, is created layer by layer from liquid resin that is solidified into shape with a laser. Because the end product created by the SL process is dependent in large part on the quality and specifications of the resins used to create it, a substantial amount of research and development is devoted to the creation of new types of resins. Desotech is a leader in the SL resin market and the holder of two equipment patents allegedly covering the resin recoating technology used in eight of the SL machines produced and sold by 3DS. 3DS likewise produces resins that can be used in the machines it sells.

Desotech alleges that since 2007, 3DS has engaged in unlawful tying, in violation of section 1 of the Sherman Act, 15 U.S.C. § 1, and section 3 of the Clayton Act, 15 U.S.C. § 14, (Counts I and II) by conditioning the sale and maintenance of its large-frame SL machines on the purchase of 3DS's resins. According to the complaint, 3DS "has expressly refused to sell and service its most recent large-frame SL machine-the Viper Pro SLA System-unless customers exclusively purchase resin from 3DS." Am. Comp. ¶ 5.

According to Desotech, 3DS has begun informing customers that only "licensed" or "approved" resins can be used in the Viper Pro, though 3DS neither told customers about the resin limitation at the time of sale nor informed competing resin suppliers about the requisite approval process. To enforce this mandate, 3DS has included in the Viper Pro a radio frequency identification, or "RFID," feature which, if activated by 3DS, will prevent the machine from working should customers attempt to use competing brands of resin. Although customers were aware that the RFID component existed, they allegedly did not know this feature could be used to preclude the use of competing resins that they may want to use. Furthermore, 3DS did not attempt to activate the RFID feature until recent software updates were made to machines already purchased. Regarding those Viper Pro machines in which 3DS has not already activated the RFID feature, 3DS has told its customers that it soon intends to do so. 3DS has warned customers that if they refuse to allow the RFID feature to be activated or if they continue to use unapproved resin, the warranty supplied by 3DS at the time of purchase will be voided.

Desotech further alleges that although 3DS used to make several other large-frame SL machines that do not have an RFID component, 3DS has stopped manufacturing those models and, moreover, is attempting to systematically eliminate them from the market. For example, 3DS has allegedly reached an agreement with a leading SL machinery maintenance contractor, National RP Support, Inc. ("National RP"), to stop servicing those older large-frame machines for which no contractual servicing obligation exists. Desotech also asserts that 3DS is removing existing large-frame SL machines from the market by offering substantial incentives to customers to trade-in old machines and purchase a Viper Pro.

Desotech alleges that in addition to unlawful tying, 3DS's contracting and licensing practices amount to an unlawful restraint of trade and attempted monopolization of the SL resin market in violation of sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2 (Counts III and IV, respectively), and the Illinois Antitrust Act, 740 Ill. Comp. Stat. 10/3 (Count V).

Desotech's complaint further alleges that 3DS has made false, misleading, and disparaging statements to Desotech customers about the quality and fitness for use of Desotech's resins, in violation of the Illinois Uniform Deceptive Trade Practices Act, 815 Ill. Comp. Stat. 510/2(a)(7)--(8), and that 3DS has tortiously interfered with prospective economic advantages reasonably anticipated by Desotech, in violation of Illinois state law.

3DS moves to dismiss all of the antitrust and state law claims set forth in the complaint.

STANDARD OF REVIEW

Defendants bring their motion under Rule 12(b)(6) for failure to state a claim upon which relief may be granted. The Supreme Court recently addressed the proper application of the federal notice pleading standards, particularly in regard to antitrust actions, in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed. 2d 929 (2007). In Twombly, the Court "retire[d]" the frequently quoted language of Conley v. Gibson, 355 U.S. 41, 45--46, 78 S.Ct. 99, 2 L.Ed. 2d 80 (1957), "that a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Twombly, 127 S.Ct. at 1968--69 ("The phrase is best forgotten as an incomplete, negative gloss on an accepted pleading standard: once a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint."). Instead, at the pleading stage, there must be "allegations plausibly suggesting" an antitrust violation; the mere possibility of later "unearthing direct evidence" through discovery is not enough to preclude dismissal. Twombly, 127 S.Ct. at 1966, 1968.

The Seventh Circuit has explained that despite "some language that could be read to suggest otherwise, the Court in Twombly made clear that it did not, in fact, supplant the basic notice-pleading standard." Tamayo v. Blagojevich, 526 F.3d 1074, 1083 (2008); see also Twombly, 127 S.Ct. at 1973, n.14 (expressly disclaiming the establishment of "any 'heightened' pleading standard" or broadening of the scope of Fed. R. Civ. P. 9); Lang v. TCF Nat'l Bank, 249 Fed. Appx. 464, 466--67 (7th Cir. 2007) (noting that notice pleading remains the pleading standard). A plaintiff still must provide only "enough detail to give the defendant fair notice of what the claim is and the grounds upon which it rests, and, through his allegations, show that it is plausible, rather than merely speculative, that he is entitled to relief." Lang, 249 Fed. Appx. at 466 (internal quotation marks and ellipses omitted) (citing EEOC v. Concentra Health Care Servs., Inc., 496 F.3d 773, 776--77 (7th Cir. 2007) (citing Twombly, 127 S.Ct. at 1964)).

For complaints involving complex litigation-for example, antitrust or RICO claims-a fuller set of factual allegations may be necessary to show that plaintiff's claims are plausible. Limestone Dev. Corp. v. Village of Lemont, Ill., 520 F.3d 797, 803 (7th Cir. 2008). Nevertheless, a plaintiff's complaint need only provide a "short and plain statement of the claim showing that the pleader is entitled to relief," Fed. R. Civ. P. 8(a)(2), sufficient to provide the defendant with "fair notice" of the claim and its basis. Twombly, 127 S.Ct. at 1964. In addressing a rule 12(b)(6) motion, the court construes the complaint in the light most favorable to the plaintiff, accepting as true all well-pleaded factual allegations and drawing all reasonable inferences in her favor. Tamayo, 526 F.3d at 1081.

DISCUSSION

I. Tying Claims (Counts I and II)

Desotech has filed two counts against 3DS for unlawful tying, the first under § 1 of the Sherman Act (Count I) and the second under § 3 of the Clayton Act (Count II). Although some older cases state otherwise, the standards for adjudicating tying claims under the two statutes are now recognized to be the same. Sheridan v. Marathon Petroleum Co., 530 F.3d 590, 592 (7th Cir. 2008). In a tying agreement, a seller conditions the sale of a product or service on the buyer's purchase of another product or service from, or by direction of, the seller. Id. at 592. Of course, every refusal to sell two products separately cannot be said to restrain competition. Reifert v. S. Cent. Wis. MLS Corp., 450 F.3d 312, 322 (7th Cir. 2006). If each of the products may be purchased separately in a competitive market, one seller's decision to sell the two in a single package imposes no unreasonable restraint on either market. D.O. McComb & Sons, Inc. v. Memory Gardens Mgmt. Corp., Inc., 736 F. Supp. 952, 957 (N.D. Ind. 1990).

The Supreme Court has established that "the essential characteristic of an invalid tying arrangement lies in the seller's exploitation of its control over the tying product to force the buyer into the purchase of a tied product that the buyer either did not want at all, or would have preferred to purchase elsewhere on different terms." Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 12, 104 S.Ct. 1551, 80 L.Ed. 2d 2 (1984), abrogated on other grounds by Ill. Tool Works, Inc. v. Indep. Ink, Inc., 547 U.S. 28, 126 S.Ct. 1281, 164 L.Ed. 2d 26 (2006). Where such "forcing" is present, "competition on the merits in the market for the tied item is restrained and the Sherman Act is violated." Id. In order to establish the per se illegality of a tying arrangement, a plaintiff must demonstrate that (1) the tying arrangement is between two distinct products or services, (2) the defendant has sufficient economic power in the tying market to appreciably restrain free competition in the market for the tied product, and (3) a not insubstantial amount of interstate commerce is affected. Reifert, 450 F.3d at 316 (7th Cir. 2006). In addition, the Seventh Circuit has held that "an illegal tying arrangement will not be found where the alleged tying company has absolutely no economic interest in the sales of the tied seller, whose products are favored by the tie-in." Carl Sandburg Vill. Condo. Ass'n No. 1 v. First Condo. Dev. Co., 758 F.2d 203, 207--08 (7th Cir. 1985); accord Reifert, 758 F.2d at 316.

Defendants contend that Desotech's complaint fails to adequately allege the first three elements of an unlawful tying arrangement. Because the court agrees that Desotech did not adequately plead the third element-that the tying arrangement forecloses a substantial volume of commerce-the other elements need not be addressed at this time.

The ultimate flaw in Desotech's tying claim is its failure to allege the existence of a coerced tying arrangement on the part of 3DS. As the Supreme Court has explained, "the essential characteristic of an invalid tying arrangement lies in the seller's exploitation of its control over the tying product to force the buyer into the purchase of a tied product" he does not want. Jefferson Parish, 466 U.S. at 12 (emphasis added). If the consumer remains free to buy the tying product without also buying the product to which it is ostensibly tied, then no coercion has occurred. See id. at 12 n.6 (citing N. Pac. Ry. Co. v. United States, 356 U.S. 1, 6 n. 4, 78 S.Ct. 514, 2 L.Ed. 2d 545 (1958)). Even if the defendant attempts to induce consumers into purchasing both products he sells by offering the bundle at discount prices, he has not engaged in illegal tying so long as the consumer remains free to purchase each item separately. See Schor v. Abbott Labs., 457 F.3d 608, 610 (7th Cir. 2006) (drug manufacturer did not effect a tying arrangement when selling a patented drug in combination with another drug at a discount because patented drug was also available for sale separately). This is because antitrust law is only concerned with behavior that has "a substantial potential for impact on competition." Jefferson Parish, 466 U.S. at 16. Furthermore, "[i]f only a single purchaser were 'forced' with respect to the purchase of a tied item, the resultant impact on competition would not be sufficient to warrant the concern of antitrust law." Id.

Many circuits thus require plaintiffs alleging tying claims to show not only that a defendant has market power but also that the defendant has wielded such market power to force consumers to alter their purchasing choices. See, e.g., United States v. Microsoft Corp., 253 F.3d 34, 85 (D.C. Cir. 2001); Thompson v. Metro. Multi-List, Inc., 934 F.2d 1566, 1577 (11th Cir. 1991). Although the Seventh Circuit does not explicitly require evidence of coercion as an independent element of tying claims, Judge Wood has recognized that demonstrating foreclosure of competition in the tied product market-the third element of the Seventh Circuit's test-is essentially equivalent to the "coercion element" required by other circuits. Reifert, 450 F.3d at 323 (Wood, J., concurring). After all, if the defendant has not forced consumers into the tying arrangement alleged, it can hardly be said that such arrangements have substantially affected interstate commerce to the detriment of those consumers.

Here, Desotech's complaint fails to adequately allege coercion on the part of 3DS. Although Desotech states that 3DS "expressly refuses to sell and service" its newest line of SL machines unless customers purchase their resin exclusively from 3DS, Am. Compl. ¶ 5, Desotech's allegations regarding particular customers fail to support such a conclusion.

Desotech alleges that 3DS told two Desotech customers, Express Pattern and Dynacept, that they could not use newer Desotech resins in their Viper Pro machines. Desotech further alleges that 3DS told Dynacept that if it continued to use "non-approved" Desotech resins in its Viper Pro machines, 3DS would withhold maintenance service and void existing warranties. Am. Compl. ¶ 63.

Although such actions on the part of 3DS might be considered a breach of warranty (or otherwise anticompetitive, as discussed in further detail below), such allegations do not amount to a tie-in. See, e.g., Va. Panel Corp. v. MAC Panel Co., 133 F.3d 860, 870--71 (D.C. Cir. 1998) ("[V]oiding a warranty on a product already sold, while possibly a breach of warranty, cannot be a tying arrangement because the purchaser is not deciding whether to buy a product."). To the extent Desotech complains that 3DS is tying the sale of its machine to its resins, such assertions cannot be supported by 3DS's actions towards Express Pattern and Dynacept, both of which had already purchased their Viper Pros at the time the alleged tie-in was executed. See N. Pac. Ry., 356 U.S. at 5--6 ("For our purposes a tying arrangement may be defined as an agreement by a ...


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