The AIPLA Antitrust News

A Publication of the AIPLA Committee on Antitrust Law May 2011
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.

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?

AIPLA Antitrust Committee Richard S. Taffet, Chair Bingham McCutchen, LLP richard.taffet@bingham.com George Gordon, Vice-Chair Dechert LLP george.gordon@dechert.com

The AIPLA Antitrust News – May 2011

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Federal Trade Commission Issues Report on the Evolving Intellectual Property Marketplace David M. Maiorana Geoffrey D. Oliver Jones Day Cleveland, OH dmaiorana@jonesday.com gdoliver@jonesday.com

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

In March of this year, the Federal Trade Commission (―FTC‖) issued a longanticipated 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

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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).

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).

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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.‖
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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 nonpracticing 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, 3

Report at 3. Id.

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 8 transfer.‖ 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
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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 4

Id. at 72. Id. at 16.

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
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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 data13 14

Id. at 15. Id. at 138. 12 Id. at 139-40.

Id. at 18-19. Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152 (6th Cir. 1978). 15 Report at 153. 16 Id. at 154.

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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 overcompensation 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

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 155-56. 18 Id. at 157.

Id. at 161-64. Id. at 170-72. 21 Id. at 176.
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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

terms of the comparable and licenses. This is consistent Federal Circuit precedent. applauds the Federal Circuit‘s ―rule-of-thumb‖ evidence in Uniloc case.26

hypothetical with recent The FTC rejection of the recent

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

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.

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.

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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 postjudgment 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 31

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.

Id. at 227-28. Id. at 232. 32 Id. at 234-35.

33 34

Id. at 241-42. Id. at 242-43.

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Developments in Consumer Standing in Walker Process Claims Michael O‘Brien35 Woodland, CA mobrien@lexmail.com

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

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 non39

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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).

Lujan v. Defenders of Wildlife, 504 U.S. 555, 56061 (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).

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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 antiinflammatory 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

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 48

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 44

Id. 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).

no. 01-1652 (D.N.J. Mar. 1, 2007) (K-DUR). 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").

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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 54 mirtazapine.‖ Essentially, one of those is required for Walker Process standing, otherwise the plaintiffs are ―donning the cloak of a Clayton Act monopolization claim….‖55

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

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.

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.)

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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 59 allegations. 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
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of California Court which is the subject of this author‘s blog has answered that question in the negative. III. The Northern Approach California

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 63

Id. at 281-82. 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.

506 F.Supp.2d 308 (N.D. Cal. 2007). 331 F.3d 704, 711-12 (9th Cir. 2003). 64 Id. at 713-14 (Pregerson, J. dissenting).

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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 66

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. 13

Id. at 316. 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.‖)

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.

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

Louisiana Wholesale Drug Co. and the Propriety of “Reverse Payment” Patent Settlements
Robert G. Pluta & Brandon C. Helms Brinks Hofer Gilson & Lione Chicago, IL rpluta@brinkshofer.com bhelms@brinkshofer.com

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. ScheringPlough 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

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: ―Payfor-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).

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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 73

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

THE FEDERALIST NO. 78 (Alexander Hamilton). 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

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).

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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

reverse payment settlements over the last year.84 Backdrop of Reverse Settlement Litigation Payment

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 87 anticompetitive. 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

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. 108173, 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.

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).

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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

settlements to be per se illegal restraints on trade.94 Denial of Certiorari Wholesale Drug in Louisiana

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 plaintiffappellants 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

89 90

35 U.S.C. § 154(1)(1) & (2). 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.

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.

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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 99

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.

Id. at 103, 106, 110. 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.

103 104

Id. at 6. 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.

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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 (DOhio), 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:

(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.
110 111

107 108

S. 27. 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-toprohibit-reverse-payments.html. 109 S. 27 at 3.

Id. at 4. 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).

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(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 secondfilers 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

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 david_swenson@baylor.edu

S. 27 at 6–7 (emphasis added).

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 20

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
113 114

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.

FTC File Number 102 3136, 3/30/11 Number 4:09-CV-01967-CW, ND Cal. 5211 21

115 116

No. 10-1172, cert. denied, US 4/25/11 550 U.S. 544 (2007).