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The AIPLA Antitrust News – May 2011 Page 1
The AIPLA Antitrust News
A Publication of the AIPLA Committee on Antitrust Law May 2011
Chairs’ Corner Welcome all, and I hope you will be
joining us at the Spring Meeting in San
Francisco. Our Committee, together with the
Corporate Counsel and Licensing Committees,
is presenting a fantastic program touching on
some of the most interesting issues involving
IP and antitrust law. Indeed, this issue of the
AIPLA Antitrust News includes articles on the
same subjects - the FTC‘s most recent
commentary on patent issues and the current
state of play on reverse payments. Thanks, as
always, to the authors: Geoff Oliver and
David Maiorana; Michael O‘Brien; and
Robert Pluta and Brandon Helms.
In considering these issues, it appears
that we may be witnessing some interesting
developments beyond those specific to
individual matters or even the FTC‘s report
itself. As pointed out by Geoff and David in
their fine overview of the FTC‘s recent report,
―An Evolving IP Marketplace,‖ the FTC‘s
focus is not on antitrust law, but on pure
patent law, and what the FTC believes may be
competitive issues arising from the application
of the patent laws.
But is this a proper direction for the
FTC? Does the FTC‘s focus take the interest
of patent owners properly into account, and
does the FTC, an antitrust agency, give proper
deference to the patent laws? Indeed, when
we consider the FTC‘s report and its current
efforts in the reverse payment area, are we
witnessing efforts by the agency that are
aimed directly at weakening the established
rules and standards for enforcement of patents
and the rights and benefits that a strong patent
system provides?
What are the implications? The FTC
has clearly set forth its position that its efforts
are directed to enhancing competition and
innovation. But is it, and is it direction
consistent with other Administration efforts on
these issues? In this regard, I commend to
you the report issued this past February by the
National Economic Council, Council of
Economic Advisors and the Office of Science
and Technology Policy, entitled ―A Strategy
for American Innovation.‖ This report makes
plain that for the United States to remain
globally competitive and for innovation to
flourish, patent holders interests must be
reinforced. This report also provides
interesting perspectives suggesting that even
the FTC‘s concept of innovation may be
limited, and not sufficiently broad or balanced
as is necessary to support true economic
growth and competitiveness.
At a minimum, these are interesting
questions, but they do go beyond the
academic. We look forward to your
participation in the dialogue.
As always, much thanks to David
Swenson, our tireless and committed editor,
publisher and guiding light for this Newsletter,
for yet another great edition.
AIPLA Antitrust Committee
Richard S. Taffet, Chair
Bingham McCutchen, LLP
George Gordon, Vice-Chair
Dechert LLP
2
Federal Trade Commission Issues Report
on the Evolving Intellectual Property
Marketplace
David M. Maiorana
Geoffrey D. Oliver
Jones Day
Cleveland, OH
In March of this year, the Federal
Trade Commission (―FTC‖) issued a long-
anticipated report recommending changes in
patent law and practice relating to notice and
remedies. The FTC‘s report, entitled ―The
Evolving IP Marketplace: Aligning Patent
Notice and Remedies With Competition‖
(the ―Report‖),1 focuses on issues of public
notice of the scope of patent claims
coverage and remedies for patent
infringement. It contains multiple specific
recommendations for changes in patent law
and practice, summarized in the Executive
Summary in the form of 35
recommendations directed to Congress, the
Patent and Trademark Office and the courts.
Many of the FTC‘s recommendations go to
fundamental issues of patent law and, if
adopted and implemented, would have a
significant impact on both patent
prosecution and litigation.
Background
The FTC has addressed intellectual
property issues before. Together with the
Antitrust Division of the U.S. Department of
Justice (―DOJ‖), the FTC issued guidelines
on the licensing of intellectual property
1 Fed. Trade Comm‘n, ―The Evolving IP
Marketplace: Aligning Patent Notice and Remedies
With Competition (March 2011) (available at
http://www.ftc.gov/os/2011/03/110307patentreport.p
df).
rights in 1995.2 In 2007, the FTC and DOJ
together issued a report focusing on antitrust
enforcement and intellectual property
rights.3 Each agency has addressed issues of
intellectual property law in the context of its
enforcement actions, amicus briefs, speeches
and other statements of policy. These
sources reflect the agencies‘ positions with
respect to the question of how the antitrust
laws should be applied to conduct involving
intellectual property that affects
competition.
The Report is different. It does not
deal with application of the antitrust laws.
Rather, it addresses issues of pure patent
law. The FTC chose to comment on these
issues because it believes the way the patent
laws are implemented can affect
competition. The FTC recommended
changes to the patent laws and the way those
laws are implemented that, in its opinion,
serve to better preserve competition. The
FTC views the Report as continuing the
―policy engagement with the patent
system‖4 that it launched in its controversial
October 2003 report regarding the ―proper
balance‖ of competition policy and patent
law.5
2 U.S. Dep‘t of Justice and Fed. Trade Comm‘n,
―Antitrust Guidelines for the Licensing of Intellectual
Property‖ (April 6, 1995) (available at
http://www.ftc.gov/bc/0558.pdf). 3 U.S. Dep‘t of Justice and Fed. Trade Comm‘n,
―Antitrust Enforcement and Intellectual Property
Rights: Promoting Innovation and Competition‖
(April 2007) (available at
http://www.ftc.gov/reports/innovation/P040101Prom
otingInnovationandCompetitionrpt0704.pdf). 4 Fed. Trade Comm‘n, Press Release, FTC Report
Recommends Improvements in Patent System to
Promote Innovation and Benefit Consumers (March
7, 2011) (available at
http://www.ftc.gov/opa/2011/03/patentreport.shtm). 5 Fed. Trade Comm‘n, ―To Promote Innovation: The
Proper Balance of Competition and Patent Law and
Policy‖ (October 2003) (available at
http://www.ftc.gov/os/2003/10/innovationrpt.pdf).
3
The FTC began its study in
December, 2008, soliciting contributions
from the public and receiving over 50
written submissions from companies,
academics and practitioners. It conducted
eight days of hearings in Washington D.C.
and Berkeley, California, at which more
than 140 witnesses presented their views.
The FTC supplemented this record with its
own independent research.
Twenty-seven months after it began
its work, the FTC issued the Report. The
Report consists of eight chapters: chapters 1
and 2 describe the FTC‘s view of the
evolving IP marketplace; chapter 3 focuses
on patent notice; and chapters 4-8 deal with
remedies. Chapters 3 and 5-8 contain the
FTC‘s specific recommendations for
changes to patent law and practice.
The introduction explains the FTC‘s
specific focus on notice and remedies. The
FTC states that notice affects competition at
every stage of the R&D process. The
―ability to identify and assess the scope of
relevant patents at an early stage‖ is
important to firms‘ decisions regarding
investments in potential new products.6
Specific product design decisions are
affected by incomplete knowledge of the
costs and availability of different
technologies. And resolution of patent
claims after product launch by means of
litigation may not only increase costs but
also deprive consumers ―of the full benefit
of competition among technologies.‖7
Ex Ante v. Ex Post Patent Licensing
Transactions
The first two chapters set forth the
FTC‘s understanding of the evolving nature
of the intellectual property ―marketplace.‖
6 Report at 3.
7 Id.
In the first chapter, the FTC describes its
view of ―open innovation,‖ in which a
company does not rely solely on its own
internal research and development for
innovation, but rather seeks the inventions it
needs from outside sources as well. The
FTC refers to acquisitions of technology in
this manner as ―ex ante‖ transactions, in
which the purchaser or licensee first obtains
the technology by means of a technology
transfer from the patent owner. The FTC
emphasizes that open innovation benefits
companies as well as consumers, and points
out that many aspects of patent law and the
patent system help to promote open
innovation.
In the second chapter, the FTC draws
a sharp distinction between ―ex ante‖
transactions and what it refers to as ―ex
post‖ transactions. It defines ―ex post‖
transactions as situations in which the
licensee has already invested in creating,
developing or commercializing the
technology in question. The Report notes
that the licensee needs a license from the
patent holder to avoid liability for patent
infringement, but the license is not
accompanied by any transfer of technology.
According to the FTC, ex post transactions
have the potential for both beneficial and
detrimental effects. The FTC attributes ex
post transactions in part to problems with
patent notice and quality and with remedies
for patent infringement, concluding that
concerns regarding ex post transactions have
increased in recent years because of an
increase in patent litigation and the
evolution of patent assertion business
models. The FTC identifies the primary
driver of this development to be ―patent
assertion entities,‖ (―PAEs‖) defined as non-
practicing entities with a business strategy
based on patent enforcement. The FTC
describes the respective roles of patent
enforcement and licensing companies,
litigation finance firms, patent aggregators,
4
defensive buying funds and intermediaries.
The FTC intends its report to address ―the
conditions of patent law and policy that have
created conditions where a patent market
based on ex post transactions has flourished
and . . . that lead to or create incentives for
patentees to pursue ex post patent
transactions rather than technology
transfer.‖8
Issues Relating to Patent Notice
Chapter 3 deals with issues relating
to patent notice to third parties as well as
patent quality. The FTC sets forth various
recommendations (separated into 16
separate specific recommendations in the
Executive Summary) intended to promote
greater clarity in the scope of patent claims
coverage, improve predictability of evolving
or future patent claims, and facilitate more
effective patent searches. Four of the
recommendations would require legislation.
Of these, one relates to funding of the PTO;
three recommendations would change
substantive law. Two recommendations are
addressed to the courts, and the remainder
are intended for the Patent and Trademark
Office.
The most far-reaching of the
recommendations relating to notice is the
proposal that Congress enact legislation ―to
protect from infringement actions third
parties who (i) infringe properly described
claims only because of claim amendments
(or new claims) following a continuation
and (ii) developed, used, or made substantial
preparation for using, the relevant product or
process before the amended (or newly
added) claims were published.‖9 This
recommendation is based on the FTC‘s
concern that the specification may not
provide sufficient notice to enable third
8 Id. at 72.
9 Id. at 16.
parties to determine the likely scope of
claims that may emerge from the
continuation process. The FTC‘s concern is
based in part on the fact that the written
description requirement is not focused on
the question of notice to others, and in part
on its perception that the PTO has been lax
in enforcing the written description
requirement. According to the FTC, if
competitors are unable to predict the claims
that might emerge from the continuation
process, competitors‘ investment decisions
may be distorted and the competitive efforts
of rivals may be impaired.
Obviously, this recommendation, if
adopted, would have a dramatic impact on
current practice. Patent owners likely would
face considerable limits in their ability to
enforce claims arising out of continuation
applications. Their ability to enforce
amended claims may depend on the nature
and extent of the amendments. The
recommendation, if adopted, would inject a
complicated new factual issue into such
patent litigation: when did the alleged
infringer first start developing, using, or
making ―substantial preparation for using‖
the product or process in question? The
recommendation could also affect the patent
prosecution process, as applicants might be
more likely to include more claims in initial
applications and, depending on the
circumstances, might resist amending patent
claims more frequently.
The remaining recommendations for
legislation, if adopted, would require
publication of all patent applications 18
months after filing, regardless of whether
the applicant has filed patent applications
abroad, and require public recording of all
assignments of patents and published patent
applications. The FTC recommends that the
courts should apply the standard of a person
having ordinary skill in the art
(―PHOSITA‖) in a manner that is fact-based
5
and appropriately tailored to the specific
technology at issue, and that the
PHOSITA‘s ability to foresee future
evolution of the claims in a patent
application should be more fully
incorporated into application of the written
description requirement. In particular, a
patent applicant ―should not be understood
to have been in possession of the subject
matter of a new or amended claim of scope
broader than what the PHOSITA, on the
filing date, could reasonably be expected to
foresee from the specification.‖10
Issues Relating to Patent Remedies
Chapter 4 discusses remedies in
general, with Chapters 5-8 analyzing lost
profits damages, the hypothetical
negotiation in reasonable royalty damages,
calculating a reasonable royalty, and
permanent injunctions, respectively.
The FTC begins by noting that, to be
effective, encourage innovation and avoid
distorting competition, patent remedies must
give the patentee what it would have earned
in the market absent infringement. To
address perceived shortcomings, the FTC
seeks to ―derive an economically grounded
approach‖ for analyzing patent remedies,
then to evaluate the current system of
damages and permanent injunctions against
that approach.11
The FTC repeats an oft-stated
criticism of the current system: remedies
must be proportional to the value of the
invention.12
The patent remedies system
must equate the overall value of an
invention with the benefit conferred to the
patentee. The FTC believes that aligning the
value of the invention with the patentee‘s
10
Id. at 15. 11
Id. at 138. 12
Id. at 139-40.
reward incentivizes innovators to pursue
inventions that will be valued by consumers.
This, in turn, promotes research and
development of those areas most likely to
have consumer value.
Chapter 5 focuses on lost profits
damages and offers three recommendations:
(1) courts should permit a patentee
―flexibility‖ in creating the ―but-for‖ world
to avoid under-compensation; (2) courts
should reject the ―entire market value rule‖
altogether, and instead require proof of the
degree of consumer preference for the
patented invention over alternatives; and (3)
courts should reject dual awards of lost
profits and reasonable royalty damages
when competition from alternatives would
have prevented the patentee from making all
of the infringer‘s sales.13
On the first point, the FTC urges
courts to reject the ―all-or-nothing‖ Panduit
test for lost profits14
in favor of a more
flexible, but less defined, approach. This
approach includes consideration of the
extent of consumer preferences for the
patented feature over alternatives, as
opposed to determining whether alternatives
fall on either side of a ―bright line dividing
the acceptable from the unacceptable.‖15
Such an analysis would recognize a ―degree
of substitutability‖ between a patented
product and noninfringing substitutes. The
Report then discusses both ends of this
spectrum, but not the likely more difficult
cases in between. The FTC does, however,
suggest that an economic analysis of the
type used in antitrust merger review can
help determine where alternatives fall on the
spectrum.16
(If applied, this would introduce
a highly detailed, fact-driven and data-
13
Id. at 18-19. 14
Panduit Corp. v. Stahlin Bros. Fibre Works, Inc.,
575 F.2d 1152 (6th
Cir. 1978). 15
Report at 153. 16
Id. at 154.
6
intensive analysis into patent damages
calculations.)
The FTC urges courts to reject the
―entire market value rule,‖ which is used to
determine whether to award lost profits
based on the entire value of the patented
product when the patented invention is only
a small part of that product. Again, the FTC
recommends rejection of a bright-line rule in
favor of the potentially more nebulous
―degree of substitutability‖ test.17
Finally, the FTC concludes that
courts should reject dual awards of lost
profits and reasonable royalties when
competition from alternatives would have
prevented the patentee from making all of
the infringer‘s sales. In cases where courts
have awarded lost profits damages based on
a portion of the infringing sales, they have
sometimes awarded reasonable royalties on
the remaining infringing sales. The FTC
views such awards as an example of over-
compensation to patentees because it ignores
competition from noninfringing
alternatives.18
Chapter 6 reviews the hypothetical
negotiation in reasonable royalty damages.
The FTC recommends that courts
considering reasonable royalty damages
move back to the true purpose of such
damages, compensating the patentee for the
value of the invention, and away from
attempts to punish or deter infringers.
The chapter begins by describing
both sides of the contentious debate on
patent damages reform, which the FTC
views as expressing similar concerns: (1)
patent damages have become divorced from
the economic value of inventions, which has
encouraged the development of PAEs who
17
Id. at 155-56. 18
Id. at 157.
sue companies for alleged infringement by
later-developed products, thus discouraging
innovation, versus (2) reducing patent
damages awards will encourage
infringement, also discouraging investments
in innovation.19
Within this framework, the Report
rejects concerns with determination of the
appropriate royalty based on a hypothetical
negotiation between a willing licensor and a
willing licensee. The first concern is the
―counterfactual nature‖ of the hypothetical
negotiation – in reality, the parties had the
opportunity to negotiate a license but chose
not to. The FTC dismisses these concerns as
unfounded.20
A second concern with reasonable
royalty damages is that merely requiring an
infringer to pay what it would have paid
anyway to license does not deter
infringement. The FTC dismisses this
concern by noting that because the
hypothetical negotiation assumes that the
patent is valid and infringed, royalties tend
to be higher following trial than they would
have been in the absence of litigation, thus
reasonable royalty awards do have some
deterrent effect. Finally, the FTC notes that
there are other mechanisms in the law to
deter infringement: enhanced damages and
permanent injunctions. The FTC‘s
recommendation is that courts should
continue to utilize the hypothetical
negotiation framework, free from any
concerns about deterring infringement or
punishing infringers.21
In Chapter 7, the FTC suggests
several steps courts can take to increase the
accuracy of reasonably royalty calculations.
First, the FTC urges courts to recognize that
19
Id. at 161-64. 20
Id. at 170-72. 21
Id. at 176.
7
the universally-applied Georgia-Pacific
factors22
are only a partial list of available
evidence to be considered in calculating
reasonable royalties. Next, the Report
recommends that courts should include in a
reasonable royalty analysis the incremental
value of the patented invention over the
―next-best‖ alternative, because this
establishes the maximum amount a willing
licensee would pay in a hypothetical
negotiation.23
The FTC next recommends that
courts make clear that the hypothetical
negotiation occurs at an early stage of
product development, before investments
are made and become sunk costs. Including
in the royalty calculation the cost of
changing designs after sunk costs are
incurred overcompensates patentees.24
The Report next recommends an
increasing role of courts in the gatekeeping
role of enforcing Rule 702 of the Federal
Rules of Evidence. This has two prongs.
First, courts must test the admissibility of
expert testimony on damages by
determining whether it will reliably assist
the trier of fact in applying the hypothetical
negotiation. Courts should also require a
showing that the expert‘s methodology is
reliable, that the expert reliably applies the
methodology to the facts, and that the
testimony is adequately supported by data.25
Applying this general
recommendation, the FTC recommends that
courts only admit testimony and evidence of
comparable licenses upon a reliable showing
of similarity between the licensed and
infringed patents, and between the non-price
22
Georgia-Pacific Corp. v. United States Plywood
Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970); Report at
179-80. 23
Report at 189. 24
Id. at 190-91. 25
Id. at 199.
terms of the comparable and hypothetical
licenses. This is consistent with recent
Federal Circuit precedent. The FTC
applauds the Federal Circuit‘s rejection of
―rule-of-thumb‖ evidence in the recent
Uniloc case.26
The last aspect of reasonable
royalties that the FTC addressed is the
choice of the royalty base to which a royalty
rate is applied to determine the amount of
damages. Not surprisingly given the
recommendation to eliminate the ―entire
market value rule‖ in the context of lost
profits damages, the FTC recommends that
courts should not use the entire market value
rule when determining the appropriate
royalty base in a reasonable royalty
calculation. In addition, courts should select
as the base the smallest priceable component
that incorporates the inventive feature.27
Finally, in Chapter 8 the FTC
analyzes permanent injunctions in patent
cases, and makes several recommendations
regarding the eBay equitable framework.28
The overall theme is that permanent
injunctions should be awarded in the
majority of cases because (1) exclusivity is
the foundation of the patent system‘s
incentive to innovate, (2) injunctions deter
infringement, and (3) a predictable
injunction threat will promote licensing.
But these goals must be balanced against the
use of an injunction threat as ―hold-up‖ to
extract overcompensation.29
The Report provides some guidance
regarding how to determine whether an
injunction is appropriate or should be denied
due to ―hold-up.‖ Such factors include: (1)
26
Uniloc USA, Inc. v. Microsoft Corp., 2011 WL
9738 (Fed. Cir. Jan. 4, 2011). 27
Id. at 212. 28
eBay, Inc. v. MercExchange, LLC, 547 U.S. 388
(2006). 29
Id. at 223-26.
8
whether the patented technology is a minor
component of a complex product that would
have been easy to design around ex ante, (2)
whether the infringer uses the patented
technology to compete with the infringer,
and (3) the absence or presence of
copying.30
The FTC next analyzes the four
eBay factors and provided recommendations
for each.
Courts should not presume
irreparable harm based on a finding of
infringement, and should recognize that
infringement can irreparably harm certain
non-practicing entities that engage in
technology transfer, such as universities and
start-ups. Conversely, PAEs may not have
the same concerns as other patentees about
deterring future infringement and protecting
their reputation as an innovator.
With respect to balance of the
equities, courts should consider the hardship
of an infringer facing ―hold-up,‖ and should
reject the notion that an infringer cannot be
heard to complain if an injunction would
destroy its business.31
Regarding the public
interest, the FTC again focuses on situations
where ―hold-up‖ occurs, noting that this
could adversely affect the public interest.32
The Report also notes that if courts
deny a request for a permanent injunction,
they should apply the hypothetical
negotiation framework to determine an
appropriate on-going royalty rate for post-
judgment infringement.
In the last section, the FTC makes
recommendations to the International Trade
Commission (―ITC‖) to avoid ―hold-up.‖
The Federal Circuit has held that the ITC is
not constrained by the eBay analysis when
30
Id. at 227-28. 31
Id. at 232. 32
Id. at 234-35.
determining whether to issue an exclusion
order, which is a permanent injunction
against importation of an infringing product.
The FTC recommends that the ITC use its
domestic industry requirement to prevent
access to the ITC by PAEs whose only
activity is extracting ex post licenses from
products already on the market.33
Second,
the FTC suggests that the ITC should utilize
the public interest factor found in 19 U.S.C.
§ 1337(d)(1) to deny exclusion orders in
cases involving hold-up, especially in cases
involving standards.34
Conclusion
The FTC‘s report comes at a time
when these and other issues are being
debated in Congress, the courts and the
Patent and Trademark Office. The Report
does not carry any specific implications for
the FTC‘s future antitrust enforcement. It
remains to be seen, however, what, if any,
impact the FTC‘s report may have on future
patent prosecution and litigation. Certainly,
as we have seen with recent efforts to reform
U.S. patent law, different industries (and
even companies within an industry), as well
as non-practicing entities, may have
divergent views on the wisdom of the FTC‘s
specific recommendations. Much is likely
to depend on the extent to which individual
parties seek to use the Report to support
their own individual arguments in these fora,
and whether the report and
recommendations are given any weight.
33
Id. at 241-42. 34
Id. at 242-43.
9
Developments in Consumer Standing in
Walker Process Claims
Michael O‘Brien35
Woodland, CA
The Supreme Court held in Walker
Process Equipment, Inc. v. Food Machinery
& Chemical Corp., 382 U.S. 172 (1965),
that ―the enforcement of a patent procured
by fraud on the Patent Office may be
violative of § 2 of the Sherman Act provided
the other elements necessary to a § 2 case
are present.‖36
The Supreme Court did not
specify who could assert such a claim and
two views have developed on the matter.
The first view finds that the Sherman Act
exists to protect competitors from
monopolistic practices in the market place
and would only give standing to competitors
who face a risk of suit for patent
infringement. In re Remeron Antitrust
Litigation.37
The second view finds that
consumers can face higher prices as a result
of a merchant‘s fraud upon the patent office
scaring off competition from the
marketplace which is an injury courts may
address. Ritz Camera & Image v. SanDisk.38
This article compares the reasoning of each
approach.
I. Constitutional and Statutory
Standing Requirements
35
Editor of the Northern District of California Blog
(www.ndcalblog.com). 36
Id. at 174; Sherman Antitrust Act, 17 U.S.C. § 2. 37
335 F.Supp.2d 522 (D.N.J. 2004) (Remeron)
(finding a consumer as a direct purchaser does not
have standing to pursue a Walker Process claim,
rather it is only available as a cross-claim in a patent
infringement action). 38
5:10-CV-02787 (N.D. Cal. Feb. 24, 2011) (Ritz
Camera) (finding a consumer does have standing to
pursue a Walker Process claim in the first instance).
As a constitutional matter, a plaintiff
must have standing in order to sue.
Constitutional standing exists where a
plaintiff 1) suffers an injury in fact 2) which
is caused by the defendant and 3) can be
remedied by a favorable court decision.39
However, ―the focus of the doctrine of
‗antitrust standing‘ is somewhat different
from that of standing as a constitutional
doctrine. Harm to the antitrust plaintiff is
sufficient to satisfy the constitutional
standing requirement of injury in fact, but
the court must make a further determination
whether the plaintiff is a proper party to
bring a private antitrust action.‖40
Antitrust
standing requires a plaintiff to show a
favorable balance of five factors: "(1) the
nature of the plaintiff's alleged injury; that
is, whether it was the type the antitrust laws
were intended to forestall; (2) the directness
of the injury; (3) the speculative measure of
the harm; (4) the risk of duplicative
recovery; and (5) the complexity in
apportioning damages."41
At issue in direct
purchaser cases is the second element.
Walker Process claims are
commonly asserted as a counterclaim to a
claim of patent infringement. Courts have
allowed anyone sued for infringement to
have standing to counterclaim with Walker
Process, even consumers.42
The two
seminal Federal Circuit decisions involved
defendants directly sued for patent
infringement, rather than a plaintiff seeking
declaratory judgment of invalidity or non-
39
Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-
61 (1992). 40
Associated Gen. Contractors of Cal., Inc. v.
Carpenters, 459 U.S. 519, 535 n.31 (1983). 41
Amarel v. Connell, 102 F.3d 1494, 1507 (9th
Cir.1996) (citing Assoc. Gen. Contractors, 459 U.S.
at 535). 42
Nobelpharma AB v. Implant Innovations, Inc., 141
F. 3d 1059 (Fed. Cir. 1998); Argus Chem. Corp. v.
Fibre Glass-Evercoat Co., 812 F.2d 1381 (Fed. Cir.
1987).
10
infringement.43
The sued consumers face an
extremely palpable injury – infringement
damages or licensing fees if they settle –
which conferred them standing to raise a
Walker Process claim.
To the contrary, the Supreme Court
has foreclosed antitrust standing to indirect
purchasers. In Illinois Brick v. Illinois the
State brought an antitrust action against a
concrete block manufacturer from whom it
had indirectly purchased concrete blocks.44
In rejecting the action for lack of standing,
the Supreme Court interpreted federal
antitrust law to prevent indirect purchasers
from seeking antitrust damages except in
certain limited circumstances.45
Those
limited circumstances have not been found
in Walker Process litigation.46
In Relafen a
set of plaintiffs sued GlaxoSmithKline
alleging that it unlawfully delayed the
marketing of a generic version of the anti-
inflammatory drug nabumetone though suits
alleging infringement of an invalid and
unenforceable patent. Citing Illinois Brick,
the court found that indirect purchasers had
no standing and dismissed their case.
However, this left the question of direct
purchaser consumer standing open, and the
Federal District Courts have reached
different results.
II. The New Jersey Approach to
Walker Process Standing
The New Jersey approach is what I
call the legal theory espoused by former
Federal Judge Stephen Orlofsky, sitting as a
special master in In re K-DUR Antitrust
43
Id. 44
431 U.S. 720, 726 (1977) (explaining that the
concrete blocks pass from the manufacturer to
masonry contractors and to general contractors before
reaching the governmental entities). 45
Id. at 728-29. 46
See e.g. In re Relafen Antitrust Litigation, 360
F.Supp.2d 166 (D. Mass. 2005) (Relafen).
Litigation.47
Mr. Orlofsky consolidated the
case law at the time and determined that the
injury caused by the antitrust violation is
best litigated a competitor who is the party
closest to the harm.48
To get there, Mr. Orlofsky begins
with a litany of cases that have answered the
same question, albeit differently. The first
word on the matter was Judge Neal Peters
McCurn in Indium Corp. of America v.
Semi-Alloys, Inc..49
That case involved a
declaratory judgment action where the
plaintiff also raised a Walker Process claim.
The court extended Walker Process standing
to producers who "were ready, willing, and
able to produce the article and would have
done so but for the exercise of exclusionary
power by the defendant."50
However, two
years later, Judge Anne E. Thompson in
Carrot Components Corp. v. Thomas &
Betts Corp., reached the exact opposite
conclusion. Carrot Components, much like
Indium, was seeking a declaratory judgment
of invalidity of two of the defendant‘s
patents and damages under a Walker
Process claim.51
The court ruled that with
respect to declaratory judgment claims, only
parties that have been directly threatened
with suit or who can demonstrate that they
reasonably anticipate a patent infringement
suit or some effort by the patent holder to
enforce the subject patent against them will
have standing to bring such a claim for
relief.
Next to speak on the matter was
Judge Richard Posner, sitting by designation
in Asahi Glass Co., Ltd. v. Pentech Pharma.,
47
no. 01-1652 (D.N.J. Mar. 1, 2007) (K-DUR). 48
Id. at 17 citing Associated General Contractors,
459 U.S. at 542. 49
591 F. Supp. 608 (N.D.N.Y. 1984). 50
Id. at 614. 51
229 U.S.P.Q. 61 (D.N.J. 1986) ("Carrot
Components").
11
Inc..52
In Asahi Glass, the plaintiff was a
supplier of the paroxetine, active ingredient
in a generic version of the drug Paxil. Asahi
sued the defendant, GlaxoSmithKline
(Glaxo) in a declaratory judgment action
similar to Carrot Components in an effort to
have the patent for Paxil declared invalid.
To show the directness of injury requirement
Asahi argued that its potential customers
were not purchasing its paroxetine product
because they feared being sued by Glaxo.53
Judge Posner observed that if plaintiff's
potential customers were deterred by
Glaxo's threat of suit, then those customers
had a cause of action against Glaxo.
However, Asahi had no right to bring an
action on that basis. Asahi Glass notes in
dicta that direct purchasers who face suit
have standing to pursue Walker Process
claims, but a supplier who is not the target
of a suit by a patent holder, does not have
standing to bring a Walker Process claim.
Mr. Orlofsky noted that Remeron
consolidated Indium and Carrot
Components to create what would become
the majority rule: ―Plaintiffs, as direct
purchasers, 1) never had the '099 patent
enforced against them, 2) were never
threatened with such enforcement, and 3)
were not in a position to manufacture a
competing generic version of
mirtazapine.‖54
Essentially, one of those is
required for Walker Process standing,
otherwise the plaintiffs are ―donning the
cloak of a Clayton Act monopolization
claim….‖55
52
289 F.Supp.2d 986 (N.D. Ill. 2003) ("Asahi
Glass"). 53
Id. at 989. 54
Remeron, 335 F.Supp.2d at 529. 55
Id.; Clayton Antitrust Act of 1914, 15 U.S.C. §§
12-27. The Clayton Act can be used as a vehicle to
enforce a Sherman Act monopolization claim, but
does not create a claim in itself for fraud upon the
USPTO. Walker Process, 382 U.S. at 178.
The only case Mr. Orlofsky could
find that cut the other way was Molecular
Diagnostics Labs. v. Hoffman-LaRoche,
Inc., which departed from all existing case
law at that moment.56
In Molecular
Diagnostics, the plaintiff, a direct purchaser
of the subject patented product, brought suit
under Section 1 of the Sherman Act
charging that it had been forced to pay
artificially inflated prices for the product as
a result of defendants' enforcement of the
patent, which plaintiffs allege was obtained
by fraud on the PTO. The Court
distinguished Carrot Companies because
here the customers were plaintiffs and
distinguished Remeron by its poor
reasoning.57
Judge Kennedy explained that
the purpose of Illinois Brick was not to limit
antitrust plaintiffs, but to ensure the correct
one was in court:
Examining these factors, the
court sees no reason to limit
standing to competitors. While
entities facing enforcement
actions are more likely to rely
on Walker Process, this reflects
more that they are in a stronger
position to detect wrongdoing
than a Congressional
preference. If one believes that
one of the primary purposes of
a treble damages action is
deterrence, then increasing the
number of parties scrutinizing
the actions of potential
monopolists will further that
goal. Moreover, because direct
purchasers have frequent
interactions with the
defendants, they have a strong
56
402 F.Supp.2d 276 (D.D.C. 2005) ("Molecular
Diagnostics"). 57
Id. at 280 (―The holding cites no controlling
precedent, nor offers any compelling justification for
its conclusion.)
12
incentive to discover and
litigate the offense. See
William H. Page, The Scope of
Liability For Antitrust
Violations, 37 Stan. L. Rev.
1445, 1488 (1985). Those
against whom a patent is
enforced, by comparison, will
generally have limited contact
with a defendant unless there is
the suspicion of infringement.58
The court ruled that direct purchasers and
competitors are equally well-suited to
pursue Walker Process claims against both
patent holders, those whose patents are
obtained through fraud or "inequitable
conduct" on the PTO and those who collude
with them.
Mr. Orlofsky outright rejected Judge
Kennedy‘s reasoning.
Against the backdrop of this case
law, I conclude that Molecular
Diagnostics is an isolated
anomaly. The fact that the
Molecular Diagnostics court
found an exception to the general
rule of antitrust standing in that
case certainly does not mean that
the "rule" has lost sway in cases
where antitrust claims are based
on Walker Process-type
allegations.59
So, does Molecular Diagnostics, ―create[]
an unnecessary [] split of authority, without
any compelling reason[?]‖60
Is it really ―an
isolated anomaly?‖61
The Northern District
58
Id. at 281-82. 59
K-Dur, at 22. 60
Fisher v. City of San Jose, 475 F.3d 1049, 1076
(9th Cir. 2007) (Callahan, J. dissent) overruled 558
F.3d 1069 (en banc) (2009). 61
K-DUR at 22.
of California Court which is the subject of
this author‘s blog has answered that question
in the negative.
III. The Northern California
Approach
The Northern California Approach is
what I call the legal theory Judge William
H. Alsup used to grant consumer standing in
In re Netflix Antitrust Litigation.62
It is
interesting that the Northern District would
be receptive to those claims since Bourns,
Inc., v. Raychem Corp. found that
competitor plaintiffs who were not prepared
to enter the market did not have Walker
Process standing.63
Though, the dissent
noted that the injury itself was specious, not
whether Bourns was a proper plaintiff.64
Nonetheless, the Northern District‘s
first exposure to the consumer direct
purchaser standing issue was In re Netflix
Antitrust Litigation. Netflix operates an
online DVD rental business and has two
patents that cover it – United States Patents
No. 6,584,450 and 7,024,381. On April 4,
2006 Netflix sued Blockbuster for
infringement of the ‗381 patent. Dennis
Dilbeck tried to intervene in the action, but
the court denied his request and the parties
subsequently settled. Undaunted, Mr.
Dilbeck filed the current action alleging a
Walker Process antitrust violation based on
the Blockbuster lawsuit. He claimed that the
patents prevented others from entering the
market and that the Blockbuster lawsuit was
a sham. Judge Alsup found standing, first
distinguishing Bourne on its facts since
Bourne did not address consumer standing.
Further, Judge Alsup found Molecular
Diagnostics persuasive because some
antitrust cases were arranged such that
62
506 F.Supp.2d 308 (N.D. Cal. 2007). 63
331 F.3d 704, 711-12 (9th Cir. 2003). 64
Id. at 713-14 (Pregerson, J. dissenting).
13
consumers were the ones with the most
direct injury. Finally he found that the New
Jersey cases were simply dealing with
something else because those cases had
better plaintiffs for the actions than the
current case.
This order finds Molecular
Diagnostics persuasive. Even though Walker
Process claims are predicated on
enforcement of a fraudulently-obtained
patent, the harm still accrues directly to
consumers. Competitors are excluded from
the market allowing the patentee to create or
maintain an unlawful monopoly.65
Judge Alsup ultimately dismissed the claims
for failure to plead with the particularity
required by Fed. R. Civ. P. 9(b).
A few years after Netflix, the Second
Circuit denied Walker Process standing to
direct purchasers generally, but not
consumers specifically.66
Subsequently, the
Central District of California adopted the
rule in Remeron.67
The issue then recently
came before the Northern District of
California again in Ritz Camera.
In Ritz Camera, the plaintiff alleged
that Eliyahou Harari tortuously converted
flash memory technology from his former
employer which led to SanDisk obtaining
U.S. Patents Number 5,172,338 and
5,991,517. Further, SanDisk failed to
65
Id. at 316. 66
In re DDAVP, 585 F.3d 677, 689-91 (2d Cir. 2009)
(―giving Walker Process standing to… [direct
purchaser] plaintiffs … could result in an avalanche
of patent challenges, because direct purchasers
otherwise unable to challenge a patent‘s validity
could do so simply by dressing their patent challenge
with a Walker Process claim.‖) 67
Kaiser Found. v. Abbot Labs., 02-2443 (C.D. Cal.
Oct. 8, 2009) (―Plaintiff is merely a potential
customer of one of Defendant's potential competitors
and, as such, Plaintiff has not claimed and cannot
claim that it did or would have competed with
Defendant.‖)
disclose prior art to the Patent Office
making the patents procured by fraud and its
effort to enforce those patents with third
parties affected the market and creates a
Walker Process claim. SanDisk moved to
dismiss stating that Ritz Camera was not a
competitor and had no standing to sue.
Judge Jeremy Fogel disagreed specifically
rejecting the reasoning of the Second
Circuit:
However, because viable Walker
Process claims are rare, it is
unlikely that many direct
purchasers will be in the same
position as Ritz is here.
Moreover, as the Supreme Court
observed in Walker Process, ―the
interest in protecting patentees
from ‗innumerable vexatious
suits‘ [may not] be used to
frustrate the assertion of rights
conferred by the antitrust laws.‖
382 U.S. at 176. Id at 7.
Further, the court notes, ―because of the
heightened evidentiary requirements
necessary for a showing of fraud, few
Walker Process claims survive summary
judgment.‖ Id. at 6-7. Judge Fogel cites no
authority for this proposition and it is
unclear how obvious this statement is.
The Northern District Cases, Netflix
and Ritz Camera, ask who Congress
intended to protect with the antitrust
statutes. They have also rekindled a debate
about the scope of permissible Walker
Process claims that was absent just five
years ago. They have also embraced the
reasoning of Molecular Diagnostics
notwithstanding K-DUR‘s charge that
Molecular Diagnostics ―is an isolated
anomaly.‖ No other courts have been
recently asked the same question and
answered it in a meaningful way.
14
Until they do, the moral of the story
for plaintiffs‘ attorneys is to try to obtain
venue in the Northern District of California.
Similarly, defense counsel should seek
venue in the District of New Jersey.
Attorneys may also follow my blog
(www.ndcalblog.com) for the latest
developments.
Louisiana Wholesale Drug Co. and
the Propriety of “Reverse
Payment” Patent Settlements
Robert G. Pluta & Brandon C. Helms
Brinks Hofer Gilson & Lione
Chicago, IL
The propriety of reverse payment
settlements is a hot-button issue, and has
been for several years, particularly in the
context of Hatch-Waxman litigation. The
Department of Justice (―DOJ‖),68 the
68
See, e.g., Brief for the United States in Response to
the Court‘s Invitation, Ark. Carpenters Health &
Welfare Fund v. Bayer, AG, No. 05-2852-cv (CON)
(2d Cir. 2009). The DOJ‘s position on reverse
payment settlements has evolved over the years. In
2004, the DOJ advocated against a per se standard
because the patentee‘s right to exclude permitted it to
restrict the sale of infringing products. See Brief for
the United States as Amicus Curiae, Andrx Pharm.,
Inc. v. Kroger Co., No. 03-779 (2004). Two years
later, the DOJ suggested that an appropriate standard
would analyze the objective likelihood of success in
the underlying patent litigation. See Brief for the
United States as Amicus Curiae, FTC v. Schering-
Plough Corp., No. 05-273 (2006). In 2007, the DOJ
made a case that the per se analysis imposed on a
patentee‘s right to exclude, but a rule of reason
analysis should be applied. See Brief for the United
States as Amicus Curiae, Joblove v. Barr Labs., Inc.,
No. 06-830 (2007). Just last year, in arguing for
Federal Trade Commission (―FTC‖),69 and
the current White House administration70
believe reverse payment settlements
should be banned. In addition, members
of Congress have criticized such
agreements and have proposed legislation
to prohibit them.71 Despite criticism from
these governmental branches—or perhaps
the catalyst behind the call to action from
these governmental bodies—the ―least
rehearing en banc in the Arkansas Carpenters case,
the DOJ reiterated its position that a rule of reason
analysis should apply to reverse payment settlements.
Brief for the United States as Amicus Curiae in
Support of Rehearing In Banc, No. 05-2851-cv(L)
(2d Cir. 2010). 69
See Jon Leibowitz, Chairman, Fed. Trade Comm‘n,
Address at the Center for American Progress: ―Pay-
for-Delay‖ Settlements in the Pharmaceutical
Industry: How Congress Can Stop Anticompetitive
Conduct, Protect Consumers‘ Wallets, and Help Pay
for Health Care Reform (The $35 Billion Solution)
(June 23, 2009) available at
http://www.ftc.gov/speeches/leibowitz/090623payfor
delayspeech.pdf. 70
See Office of Mgmt. & Budget, Executive Office
of the President, Budget of the United States
Government, Fiscal Year 2012, at 81 (2011),
available at http://
www.whitehouse.gov/omb/budget/Overview (―The
President‘s Budget included two proposals to
increase availability of generic drugs by providing
the Federal Trade Commission authority to stop drug
companies from entering into anticompetitive
agreements intended to block consumer access to safe
and effective generics, and hastening availability of
generic biologics while retaining the appropriate
incentives for research and development for the
innovation of breakthrough products.‖). 71
See, e.g., 148 Cong. Rec. S7565 (July 30, 2002)
(Sen. Hatch) (―As coauthor of the [Hatch-Waxman
Act], I can tell you that I find these type[s] of reverse
payment collusive arrangements appalling‖); 146
Cong. Rec. E1538–02 (Sept. 20, 2000) (Rep.
Waxman) (―requir[ing] companies seeking to reach
secret, anticompetitive agreements to disclose them
to the FTC … [would] ensure that existing antitrust
and drug approval laws are enforced to the letter‖); S.
27 (Feb. 2011) (bill that would render reverse
payment settlements presumptively in violation of
antitrust laws).
15
dangerous branch‖72 of the government
has largely found reverse payment
settlements to be valid.
When a party pays an opposing
party in order to settle a patent
infringement lawsuit, typically it is the
accused infringer paying the patentee.
―Reverse payment‖ settlements, however,
involve a patent owner paying the accused
infringer in order to settle the lawsuit.
Reverse payment settlements, also known
as ―pay-for-delay‖ agreements, occur most
often in Hatch-Waxman litigation, where a
brand pharmaceutical company pays a
would-be generic competitor not to enter
the market.73 Proponents of reverse
payment settlements emphasize the
substantial costs involved with researching
and developing new inventions—
particularly in developing new drugs—
combined with the large fees associated
with patent litigation. Some studies
estimate it may cost a drug company
upwards of $800 million to bring a new
drug to market, and empirical evidence
exists to suggest drug profits are directly
proportional to the extent of the research
and development efforts.74 And, because a
72
THE FEDERALIST NO. 78 (Alexander Hamilton). 73
See King Drug Co. v. Cephalon, Inc., 702 F. Supp.
2d 514, 518 (E.D. Pa. 2010) (―[Reverse payment]
settlements are typically entered into as a result of
patent litigation between a brand name drug
manufacturer and generic drug manufacturers.‖). 74
Joseph A. DiMasi, Ronald W. Hansen & Henry G.
Grabowski, The Price of Innovation: New Estimates
of Drug Development Costs, 22 J. HEALTH ECON. 151
(2003); Carmello Giacatto et al., Drug Prices and
Research and Development Investment Behavior in
the Pharmaceutical Industry, 48 J.L. & ECON 195
(2005). Under the Food, Drug, and Cosmetic Act, a
brand drug manufacturer must demonstrate that a
drug is safe and effective before the FDA will
approve it for marketing. 21 U.S.C. § 355(d) (2009).
The brand drug manufacturer makes this showing
through a New Drug Application (―NDA‖), which is
new drug is essentially an information
good—once the formula is known, it is
often comparably easy and inexpensive for
potential generic competitors to
manufacture the drug—patent protection is
of the highest import for brand drug
manufacturers.75 Pharmaceutical
companies often spend an additional $1
million to $25 million to enforce their
patents, with the typical Hatch-Waxman
case requiring the drug brand
manufacturer to spend at least $4 million
through trial and appeal.76 Reverse
payment settlements, it is argued, permit a
brand drug manufacturer to avoid the costs
of litigation while maintaining its right to
exclude infringing products.
Critics of reverse payment
settlements, however, believe the
agreements violate antitrust laws. A
central purpose of the Hatch-Waxman
a time-consuming process that costs millions of
dollars. Thus, brand drug manufacturers rely heavily
on patent protection in order to recoup the costs of an
initial investment in the drug. See Richard C. Levin
et al., Appropriating the Returns from Industrial
Research and Development, 1987 BROOKINGS
PAPERS ON ECON. ACTIVITY (SPECIAL ISSUE) 783,
795–96, 819 (illustrating that brand drug
manufacturers value patents highly as appropriation
means); see also Eli Lilly & Co. v. Teva Pharms.
USA, Inc., 609 F. Supp. 2d 786, 811 n. 23 (S.D. Ind.
2009) (providing examples of steep erosion of brand
sales upon generic entry). 75
See C. Scott Hemphill, Paying for Delay:
Pharmaceutical Patent Settlement as a Regulatory
Design Problem, 81 N.Y.U. L. Rev. 1553 (2006)
(noting that brand drug companies, compared to
innovators in other industries, cannot as easily rely
upon a head start, complementary assets, and scale of
production as means to preserve profits). 76
American Intellectual Property Law Association,
Report of the Economic Survey (observing that costs
often rise above $4 million when the patented
product is worth more than $25 million).
16
statute77 is ―to enable competitors to bring
cheaper, generic … drugs to market as
quickly as possible.‖78 According to
critics, reverse payment settlements thwart
this statutory objective by stifling generic
competition, resulting in higher drug costs
for consumers.79 According to one
antitrust plaintiff, reverse payment
settlements cost consumers and taxpayers
$3.5 billion annually.80
Nonetheless, the Supreme Court
recently denied certiorari in a case
revolving around whether reverse payment
settlements are valid under antitrust laws.81
Contemporaneously, Senator Herb Kohl
(D-Wis.) has introduced legislation
intended to prohibit reverse payment
settlements,82 notwithstanding the failure
of previous attempts to pass similar
legislation.83 Thus, the status quo remains
and patent litigants likely will continue to
use reverse payment settlements to resolve
certain patent litigations. This paper
explores recent developments regarding
77
Drug Price Competition and Patent Term
Restoration Act of 1984, Pub. L. No. 98-417, 98 Stat.
1585
(1984) (codified at 21 U.S.C. §§ 355, 360(cc) (2000),
35 U.S.C. §§ 156, 271, 282 (2000)), as amended
by the Medicare Prescription Drug, Improvement,
and Modernization Act of 2003, Pub. L. No. 108-
173, 117 Stat. 2066 (2003) (―MMA‖). 78
Teva Pharms. USA, Inc. v. Novartis Pharms.
Corp., 482 F.3d 1330, 1344 (Fed. Cir. 2007) (quoting
149 Cong. Rec. S15885 (Nov. 25, 2003).
79
See generally Bigelow & Willig, “Reverse
Payments” in Settlements of Patent Litigation:
Schering-Plough, K-Dur, and the FTC, in THE
ANTITRUST REVOLUTION 248 (Kwoka, Jr. & White
eds., 2005). 80
Brief of Petitioner at 5–6, La. Wholesale Drug Co.
v. Bayer AG, No. 10-762. 81
La. Wholesale Drug Co. v. Bayer, No. 10-762. 82
See S. 27. 83
See, e.g., S. 369.
reverse payment settlements over the last
year.84
Backdrop of Reverse Payment
Settlement Litigation
The legal issue associated with
reverse payment settlements is whether
they are unreasonable—and therefore
illegal—restraints on trade in violation of
the Sherman Act.85 Courts employ one of
two tests when considering whether a
restraint on trade is unreasonable: (1) a
per se analysis or (2) a ―rule-of-reason‖
analysis.86 Courts apply the per se
analysis when other courts previously have
considered the same type of conduct at
issue and found the likely effects of the
conduct to be significantly
anticompetitive.87
A rule-of-reason analysis is used
when a per se analysis is inappropriate.
Under a rule-of-reason analysis, a court
determines whether the restraint on trade
merely regulates and promotes
competition or whether it suppresses or
even destroys competition.88 A reverse
payment situation complicates the antitrust
84
A more detailed analysis of the Hatch-Waxman
framework and earlier cases involving reverse
payment settlements can be found in the article by
Robert G. Pluta titled “Promoting the Progress” or
Paying for Delay: Balancing Patent and Antitrust
Law in the Age of Health Care Reform, 11 Engage 86
(Mar. 2010). See also Robert G. Pluta and Jeremy S.
Snodgrass, "Reverse Payment" Patent Settlements:
Recent Cases and Legislation, The AIPLA Antitrust
News—May 2011, 9-15. 85
15 U.S.C. § 2; State Oil Co. v. Khan, 522 U.S. 3,
10 (1997) (noting Supreme Court ―has long
recognized that Congress intended to outlaw only
unreasonable restraints‖ on trade). 86
State Oil, 522 U.S. at 10. 87
Id. 88
Fed. Trade Comm’n v. Ind. Fed’n of Dentists, 476
U.S. 447 (1986).
17
analysis because courts must consider that
patent law grants an innovator ―the right to
exclude others from making, using,
offering for sale, or selling the invention
throughout the United States or importing
the invention into the United States.‖89
To date, courts have struggled with
the reverse payment issue, but generally
agree such payments are not per se illegal.
The D.C. Circuit holds that such
agreements must be analyzed under
antitrust analysis to determine whether
they are unreasonable restraints on trade.90
The other circuit courts to consider the
issue—the Second, Eleventh, and Federal
Circuits—hold that the antitrust per se
analysis and the rule of reason analysis are
inappropriate because patents are
exclusionary by their very nature.91
Instead, courts must consider whether
reverse payment settlement agreements
exceed the exclusionary power of
patents.92 None of these courts have held
reverse payments to be invalid, concluding
that reverse settlement payments violate
antitrust law only where there is evidence
of fraud on the Patent & Trademark Office
(―PTO‖) or the litigation is a sham.93 To
date, only one circuit court, the Sixth
Circuit, has found reverse payment
89
35 U.S.C. § 154(1)(1) & (2). 90
See, e.g., Andrx Pharms., Inc. v. Biovail Corp.
Int’l, 256 F.3d 799, 810 (D.C. Cir. 2001). 91
See, e.g., In re Ciprofloxacin Hydrochloride
Antitrust Litig., 544 F.3d 1323, 1335–36 (Fed. Cir.
2008); In re Tamoxifen Citrate Antitrust Litig., 466
F.3d 187 (2d. Cir. 2006); Schering-Plough Corp. v.
Fed. Trade Comm’n, 402 F.3d 1056 (11th Cir. 2005). 92
Id. 93
Id. Moreover, a court need not consider the
validity of a patent when analyzing the validity of a
reverse payment settlement agreement unless there is
evidence of fraud before the PTO or sham litigation.
Id.
settlements to be per se illegal restraints
on trade.94
Denial of Certiorari in Louisiana
Wholesale Drug
To date, the FTC and antitrust
plaintiffs have been unable to convince the
Supreme Court to grant certiorari to
review the validity of reverse payment
settlements. The most recent setback for
opponents of reverse payment settlements
occurred in early 2011, when the Court
denied certiorari in Louisiana Wholesale
Drug Co. v. Bayer AG.95 The petitioners
in Louisiana Wholesale were the plaintiff-
appellants from the Second Circuit
decision Arkansas Carpenters Health &
Welfare Fund v. Bayer AG, 604 F.3d 98
(2d Cir. 2010).
In Arkansas Carpenters, the
plaintiffs, direct and indirect purchasers of
ciprofloxacin hydrochloride, averred that
the reverse payment settlement agreement
entered into by Bayer AG with generic
pharmaceutical company Barr
Laboratories, Inc. violated antitrust law.96
Specifically, Bayer agreed to pay Barr
$49.1 million immediately and between
$12.5 and $17.125 million quarterly for
the duration of the relevant patent; in
return, Barr conceded the patent‘s validity
and agreed not to market a generic
ciprofloxacin prior to the patent‘s
expiration.97 The district court granted
summary judgment for Bayer and Barr and
the Second Circuit affirmed, finding the
case indistinguishable from its
94
In re Cardizem CD Antitrust Litig., 332 F.3d 896
(6th Cir. 2003). 95
__S. Ct.__, No. 10-762, 2011 WL 727622 (Mar. 7,
2011). 96
Id. at 100–02. 97
Id. at 102.
18
precedential decision in In re Tamoxifen,
which ―rejected antitrust challenges to
reverse payments as a matter of law.‖98
The Court rejected the petition for
certiorari on March 7, 2011.99 In fact, the
Court has consistently refused to hear
reverse payment settlement cases, as the
Louisiana Wholesale petitioners noted.100
Because the majority of circuit courts
believe reverse payment settlements are
valid, and because the Supreme Court
refuses to hear these cases, it seems
unlikely that the judicial system will do
anything to disrupt the use of reverse
payment settlement agreements.
By denying certiorari, the Court
also rejected some unique arguments set
forth in the amicus briefs. For example,
The Public Patent Foundation argues that
the quality of U.S. patents is poor
compared to patents issued in Europe and
Japan, and therefore consumers are
harmed when patent owners are able to
avoid invalidation of their weak patents by
paying would-be competitors to settle.101
According to the foundation, a study of
70,000 issued U.S. patents found that
foreign counterpart patents issued only
72.5% of the time in Europe and only
44.5% of the time in Japan.102
Compounding this problem is the fact that
98
Id. at 103, 106, 110. 99
La. Wholesale Drug Co. v. Bayer, No. 10-762.
Justices Sotomayor and Kagan took no part in the
consideration or decision. 100
Brief of Petitioner at 33, La. Wholesale Drug Co.
v. Bayer AG, No. 10-762. See also, for example, the
Court‘s denial of certiorari in Joblove v. Barr
Laboratories, Inc., No. 06-830 (June 25, 2007). 101
See generally Brief of the Public Patent
Foundation as Amicus Curiae in Support of
Petitioners, La. Wholesale Drug Co. v. Bayer AG,
No. 10-762. 102
Id. at 8.
the ―technology involved with litigated
patents is almost without exception
extremely valuable.‖ Therefore, the
foundation contends that mistakes
involving the validity of litigated patents
can cause severe harm to the marketplace,
and the public needs would-be competitors
to challenge those patents instead of
colluding with patent owners to reap the
rewards of invalid patents.103
In a similar vein, the National
Association of Chain Drug Stores, Inc.
contends that the appropriate analysis for
reverse payment settlements must consider
the possibility that the patent being
enforced is invalid.104 The association
argues there is no absolute right to exclude
afforded by the patent laws, as a patent is
simply the conclusion of a legal analysis
conducted by the Patent and Trademark
Office (―PTO‖).105 Moreover, the
presumption of validity is a procedural
device, not substantive law, and the public
has an interest in judicial determination of
patent validity due to the monopolistic
nature of patents.106 For those reasons, the
association argues that in order to maintain
the proper balance between competition
and patent protection, the validity of the
underlying patent must be analyzed when
considering the legality of reverse
payment settlements. Nonetheless, the
Supreme Court did not find the arguments
of the amici curiae important enough to
warrant judicial review.
103
Id. at 6. 104
See generally Brief of Amicus Curiae National
Association of Chain Drug Stores, Inc. in Support of
Petitioners, La. Wholesale Drug Co. v. Bayer AG,
No. 10-762. 105
Id. at 4. 106
Id. at 5–6.
19
Congress Continues To Fight Reverse
Payment Settlements—To No Avail
Due to the reluctance of federal
courts to find fault with reverse payment
settlements, members of Congress have
taken up the cause against these
agreements—with little success. For
example, Senator Herb Kohl (D-Wis.),
along with Senators Sherrod Brown (D-
Ohio), Susan Collins (R-Me.), Richard
Durbin (D-Ill.), Al Franken (D-Minn.),
Chuck Grassley (R-Iowa), Amy Klobuchar
(D-Minn.), and Bernard Sanders (I-Vt.)
introduced the Preserve Access to
Affordable Generics Act (―Preserve
Access Act‖) in February of this year.107
The act marks the third straight Congress
in which Senator Kohl has submitted
legislation intended to outlaw reverse
payment settlements.108
The Preserve Access Act states in
the Congressional Findings section that
reverse payment settlements ―have unduly
delayed the marketing of low-cost generic
drugs contrary to free competition, the
interests of consumers, and the principles
of underlying antitrust law.‖109 In order to
combat such agreements, the act declares:
An agreement shall be
presumed to have an
anticompetitive effect and
be unlawful if:
107
S. 27. 108
Donald Zuhn, Sen. Kohl Introduces Bill to
Prohibit Reverse Payments, Patent Docs (Feb. 2,
2011, 11:59 PM), http://www.
patentdocs.org/2011/02/sen-kohl-introduces-bill-to-
prohibit-reverse-payments.html. 109
S. 27 at 3.
(i) An ANDA filer
receives anything
of value; and
(ii) The ANDA filer
agrees to limit or
forego research,
development,
manufacturing,
marketing, or
sales of the
ANDA product
for any period of
time.110
It has been suggested that the
proscription against a generic company
receiving ―anything of value‖ is so vague
as to be meaningless.111 To perhaps
address this criticism, the Preserve Access
Act clarifies that it does not ―prohibit a
resolution or settlement of a patent
infringement claim in which the
consideration‖ received includes ―only one
or more‖ of the following:
(1) The right to market
the ANDA product in the United
States prior to the expiration of—
(A) Any patent
that is the basis for the
patent infringement claim;
or
(B) Any patent
right or other statutory
exclusivity that would
prevent the marketing of
such drug.
110
Id. at 4. 111
See, e.g., Robert G. Pluta, “Promoting the
Progress” or Paying for Delay: Balancing Patent
and Antitrust Law in the Age of Health Care Reform,
11 Engage 86, 88 (Mar. 2010).
20
(2) A payment
for reasonable litigation expenses
not to exceed $7,500,000.
(3) A covenant not to
sue on any claim that the ANDA
product infringes a United States
patent.112
Thus, the act seeks to permit settlement of
Hatch-Waxman lawsuits so long as the
ANDA filer does not do one of the
following: (1) agree to refrain from
entering the market until expiration of the
asserted patent, (2) receive more than $7.5
million from the brand drug manufacturer,
or (3) stipulate to the validity and/or
infringement of the asserted patent.
The act is still vague, however,
because the act appears to prohibit any
settlement agreement that contains a
clause other than the three explicitly set
forth. Moreover, the act prevents certain
settlement agreements used by second-
filers that have no anti-competitive effects.
For example, it is not uncommon for a
second-filer to stipulate to the
infringement and validity of a patent, and
in return receive the right to launch a
generic product prior to patent expiration
should another ANDA filer be successful
in challenging the patent. This type of
agreement permits the second-filer to
avoid litigation expenses and also has no
anticompetitive effect as the second-filer
has no market exclusivity right that would
prevent other generic companies from
launching their products. Based on this
reason and the past failures of Senator
Kohl‘s bills, it seems unlikely that
Congress will approve this act as currently
drafted.
112
S. 27 at 6–7 (emphasis added).
Conclusion
Proponents of reverse payment
settlement agreements argue that the
agreements are valid because they fall
within the right of the patent owner to
exclude others from making and selling
infringing products. Critics argue that the
right to exclude under the patent laws must
be balanced with the need to avoid
monopolistic restraints on trade. The
White House, the FTC, and Congress have
taken up the fight against the agreements,
but the federal courts have routinely found
them to be valid. And because the
Supreme Court is reluctant to review the
validity of reverse payment settlement
agreements, the status quo will remain for
the foreseeable future.
EDITOR’S NOTES: PRIVACY
RIGHTS, ATHLETE IMAGES AND
TEXT MESSAGES
David G. Swenson
Baylor University School of Law
Waco, Texas
A number of developments involving
Antitrust Law have occurred since the time
of the last newsletter. As mentioned above,
the issue of reverse payments is still very
much alive. In fact, the FTC announced on
May 3, 2011, that the number of reverse
payment agreements entered into by
pharmaceutical companies during 2010 had
increased by more than 60% to an all time
high of 31. The staff reported that a total of
22 brand name pharmaceuticals with sales
nearing $10 Billion were involved in these
arrangements. The staff report indicated a
21
particular concern that 26 of the 31
settlement agreements involved producers of
generic drugs that would have been the first
party to market the generic version of the
branded drug. The FTC clearly is
continuing its long expressed concern with
both the desirability and legality of these
reverse payment agreements.
In another development, the FTC
announced that it had reached a settlement
with Google as an outgrowth of last year‘s
launch of the ―Buzz‖ social network. The
settlement, In re Google, Inc,.113
was
unusual in that the consent decree calls for
implementation by Google of a
comprehensive program to ensure user
privacy rights are respected along with third
party audits to ensure that privacy concerns
are satisfied for the next 20 years.
Although most of the antitrust
interest in the sports world seems to be
focused right now on the ongoing dispute
between the NFL and NFL Players
Association, that is not the only antitrust
case affecting the sports world. A class
action on behalf of former college student
athletes challenging the use of their names
and likenesses in video games has survived
a motion to dismiss, In re NCAA Student
Athlete Name and Likeness Litigation.114
Although the first complaint was dismissed,
the district court just held that the second
amended complaint states plausible claims
for relief under the antitrust laws. At least
that was the conclusion in terms of the
potential liability of the NCAA and the
Collegiate Licensing Company (CLC). The
video game producer Electronic Arts, Inc.
was successful on their claim to dismiss but
leave was granted for a further amended
113
FTC File Number 102 3136, 3/30/11 114
Number 4:09-CV-01967-CW, ND Cal.
5211
complaint to be filed. The complaint as
amended was sufficient in the court‘s view
to support a conclusion that CLC may have
been agreeing to facilitate an effort by the
NCAA to reduce competition in the
collegiate licensing market.
Finally, the Supreme Court decided
to allow a 7th
Circuit decision regarding
alleged price fixing to stand in Cellco
Partnership v. Morris.115
The defendants
were four companies that together were
responsible for 90% of the text messaging
services sold in the United States. The 7th
Circuit had concluded that plaintiff‘s
allegations were sufficient to meet the
pleading requirements of Bell Atlantic Corp.
v. Twombly.116
Petitioner‘s attempts to paint
the issue as inferring a conspiracy only
because the defendants are members of the
same trade association who exist in a
concentrated industry and adopt similar
pricing practices was unsuccessful, so the
case will proceed.
115
No. 10-1172, cert. denied, US 4/25/11 116
550 U.S. 544 (2007).
