Avaya Inc. v. Telecom Labs, Inc.

838 F.3d 354

Avaya Inc., RP, Appellant in 14–4174

v.Telecom Labs, Inc.; Teamtli.com Corp., Continuant, Inc., Scott Graham; Douglas Graham ; Bruce Shelby Telecom Labs Inc., Continuant Inc., Appellants in 14–4277

Nos. 14–4174 &

14–4277

United States Court of Appeals, Third Circuit.

Argued January 19, 2016

Filed: September 30, 2016

Seth P. Waxman [ARGUED], Leon B. Greenfield, Danielle M. Spinelli, Catherine M.A. Carroll, David L. Sluis, Jonathan A. Bressler, Thomas G. Sprankling, Wilmer Cutler Pickering Hale and Dorr LLP, 1875 Pennsylvania Avenue, NW, Washington, DC 20006, Robert T. Egan, Mark J. Oberstaedt, Archer & Greiner P.C., One Centennial Square, 33 E. Euclid Avenue, Haddonfield, NJ 08033, Jacob A. Kramer, Bryan Cave LLP, 1155 F Street, NW, Washington, DC 20004, Lawrence G. Scarborough, Bryan Cave LLP, Two North Central Avenue—Ste. 2200, Phoenix, AZ 85004, Counsel for Appellant/Cross–Appellee

Douglas F. Broder, K&L Gates LLP, 599 Lexington Avenue, New York, NY 10022, Raymond A. Cardozo, Paul D. Fogel, Reed Smith LLP, 101 Second Street—Ste. 1800, San Francisco, CA 94105, Kathy D. Helmer, Scott G. Kobil, Anthony P. LaRocco, John Marmora, Charles F. Rysavy, K&L Gates LLP, One Newark Center—10th Fl., Newark, NJ 07102, Richard L. Heppner, Jr., James C. Martin [ARGUED], Colin E. Wrabley, Reed Smith LLP, 225 Fifth Avenue—Ste. 1200, Pittsburgh, PA 15222, Counsel for Appellees/Cross–Appellants

Before: JORDAN, HARDIMAN, and GREENAWAY, JR., Circuit Judges.

OPINION OF THE COURT

JORDAN, Circuit Judge.

Table of Contents

I. Introduction ...365

II. Background ...366

A. Factual Background ...366

1. PBX Systems and Maintenance ...366

2. PDS Systems and Maintenance ...369

3. The Dispute between Avaya and TLI ...369

B. Procedural Background ...371

III. Avaya's Appeals ...373

A. Judgment as a Matter of Law on Avaya's Common Law Claims ...373

1. Evidence Supporting Avaya's Common Law Claims ...3742. Customer Contract Interpretation ...378

3. Tortious Interference with Prospective Business Advantage ...381

4. Unfair Competition ...386

5. Fraud ...388

6. Breach of Contract ...389

7. Conclusion ...392

B. Prejudice on the Antitrust Verdict ...392

1. General Prejudice to Avaya's Antitrust Defense ...392

2. “Fear, Uncertainty, and Doubt” Letters ...392

3. Interference with Defense and Cross-Examination ...395

4. Harmless Error Analysis ...396

C. Antitrust Issues ...397

1. Tying in Antitrust Law ...397

2. PBX Attempted Monopolization Claim ...404

3. PDS Tying Claim ...407

IV. TLI's Cross-Appeals ...409

A. Summary Judgment on TLI's Common Law Claims ...410

B. Summary Judgment on PBX Upgrade Tying Claim ...412

C. Noerr–Pennington Ruling ...413

V. Conclusion ...414

I. Introduction

When asked why he was so intent on scaling Mount Everest, the ill-fated mountaineer George Mallory famously replied: “because it's there.”¹ The parties before us have put a twist on that philosophy: they have created their own mountain of issues and have argued, appealed, and cross-appealed nearly all of them.² Unfortunately, if there had been a hope of bringing this matter to conclusion any time soon, that was dashed when, in the middle of trial, the District Court erroneously granted judgment as a matter of law against one side, tainting the entire trial and the ultimate verdict. We will therefore vacate the judgment of the District Court and remand with instructions for further proceedings. We do not take this step lightly, but the error of the District Court here was of such magnitude that we seriously doubt the correctness of the ultimate verdict.

This case arises from the fractured relationship between a large communications equipment manufacturer, Avaya Inc. (“Avaya”), and one of its dealers and service providers, TLI.³ After they fell out, Avaya aggressively acted to block TLI from providing independent maintenance services for Avaya equipment. Meanwhile, the now-independent TLI took a series of legally dubious actions to gain access to Avaya communications systems used by clients the parties once shared. Avaya filed suit, alleging several business torts and breach of contract; TLI counter-sued for antitrust violations. After years of pre-trial litigation, and in the midst of a months-long trial, the District Court granted TLI's motion under Federal Rule of Civil Procedure 50 for judgment as a matter of law against Avaya on all of Avaya's affirmative claims. The Court later instructed the jury that none of TLI's actions could be considered unlawful. With that instruction guiding it, the jury found Avaya liable for two antitrust violations and awarded substantial damages.

We conclude that the entry of judgment as a matter of law was erroneous. Given how intertwined the two sides' claims are—and given that Avaya's antitrust defense relied in large part on justifying Avaya's conduct as a response to TLI's conduct—we also conclude that the erroneous Rule 50 judgment infected the jury's verdict. We must therefore vacate the judgment of the District Court. A tour of the mountain follows.

II. Background

A. Factual Background

Avaya, the appellant and cross-appellee, “designs, manufactures, sells, and maintains telecommunications equipment.” (Opening Br. at 7.) Two of its products in particular are the subject of this suit. The first is its private branch exchange (“PBX”), which “is essentially a special-purpose computer ... that functions as a telephone switchboard” and is used by “[l]arge organizations needing an internal telephone network.” (Id. ) The second product is its predictive dialing system (“PDS”), which is an “automated telephone dialing system that uses a predictive algorithm to anticipate when the user ... will be able to reach someone, improving the chances a call will be answered.” (Id. at 7–8.) The PBX technology was invented in the 1980s by AT&T Co., which in 1996 spun its PBX business off to Lucent Technologies, Inc., which in turn spun off Avaya in 2000.

TLI and three individuals who operated it are the appellees and cross-appellants. TLI sold post-warranty maintenance for Avaya PBXs and PDSs. At one point, TLI was also part of Avaya's Business Partner program, selling communications systems on Avaya's behalf. When Avaya began downsizing from 1999 to 2001, it encouraged its Business Partners to hire laid-off Avaya maintenance technicians, even subsidizing that process. TLI made several such hires and began to offer maintenance services in 2001. Not long after, in 2003, TLI and Avaya acrimoniously severed their relationship,⁴ but TLI continued to provide maintenance services on Avaya products as an independent service provider.

1. PBX Systems and Maintenance

Of the two types of systems at issue in this litigation, the PBX has a substantially larger market. Avaya characterizes PBX systems as durable goods with extended longevity and high fixed costs. During much of the time relevant to this suit, PBX systems had a useful lifespan of about eight years, though some could remain in use for decades.⁵ They have many capabilities but were sold in a default mode without most of them activated. Customers could then license individual capabilities, depending on their needs. As one Avaya systems engineer explained it at trial, Avaya “provide[s] software to our customers that's able to do a vast number of things, but customers don't want to pay for all the things the software can do. ... They may not need all the capabilities ... . So we allow customers to purchase the right to use aspects of the software ... .” (J.A. 1886.)

One of those “aspects” is a set of maintenance features⁶ that was and is licensed separately from the PBX system itself. Those features are accessed via on-demand maintenance commands (“ODMCs”). Users of the maintenance features—whether Avaya technicians, non-Avaya technicians, or customers themselves—access the pertinent software using login credentials. Each login is matched to the ODMCs that that specific user is authorized to use. In addition to controlling those logins, Avaya has a second way to regulate access to the ODMCs. The ODMCs are only useable on a given PBX system if Avaya has activated the corresponding maintenance software permissions (“MSPs”). Avaya's PBX systems come with the MSPs disabled, but customers who execute a specific license agreement can have the MSPs, and hence the ODMCs, enabled. Later, when that license terminates, Avaya disables the MSPs.

Avaya and its authorized Business Partners offer maintenance service, which is a profitable line of business. Avaya contends that the “margin on the initial sale of a PBX is ‘thin,’ ” whereas the rate of profit on maintenance work is much higher. (Opening Br. at 8.) It says that the profit the company earns from maintenance is an important source of funds for the improvement of PBX systems and the development of new models, which are released roughly every two years. According to Avaya, its major competitors in this market—Cisco, Siemens, and Microsoft—follow a similar business model of low-margin equipment and high-margin maintenance, and those firms compete with each other and with Avaya over the “total cost of ownership” of both equipment and maintenance. (Opening Br. at 9.)

During the time period covered by this litigation, Avaya offered three tiers of maintenance options for PBX customers. The highest-end, most expensive option was to buy maintenance from Avaya itself, whose technicians had full access to ODMCs and certain other Avaya software capabilities.

The second, intermediate, option was to purchase maintenance from an authorized Avaya Business Partner. Business Partners could access a customer's maintenance software through a login called “DADMIN,” once Avaya activated it on a customer's PBX. As participants in Avaya's maintenance program, Business Partners had to complete special training and were given access to engineering support. They also had to agree not to solicit maintenance contracts from existing Avaya maintenance customers. Avaya forthrightly admits that it thus imposed vertical restraints...