FYI, I will be speaking on “Antitrust Issues in Intellectual Property Licensing Transactions” on November 6, 2013 at 1:00 P.M. Eastern Time. Here is a link to the webinar program. I will be covering the Nine “No-Nos” of antitrust/intellectual property licensing, which I’ve written about previously in this blog.
The Supreme Court’s recent decision in Federal Trade Commission v. Actavis, Inc., No. 12-416, ___ U.S. ___ (2013), has generated a lot of commentary recently. Some articles have suggested that the decision may expose certain intellectual property (IP) licensing decisions to antitrust scrutiny that prior to Actavis would have been immune from antitrust attack. “Under Actavis, the question needs to be asked now whether a field of use restriction ‘within the scope of the patent’ raises significant antitrust concerns in particular circumstances.” See here.
But I think that it is unlikely that Actavis will be expanded beyond its peculiar confines to upset the traditional rule that patent licensing agreements that limit the field of use raise no antitrust issues.
In Actavis, the manufacturer of a brand name prescription drug brought a patent infringement suit against a generic drug manufacturer that intended to market an allegedly infringing version of the branded drug prior to the patent’s expiration. In the specific context of the Hatch-Waxman Act, the Court considered whether the Sherman Act ever could be violated by a payment by the brand name manufacturer (the patentee) to the generic manufacturer (the alleged infringer) as part of a settlement in which the generic manufacturer would agree not to market the generic versions of the drug for some period of time within the patent term.
The Court recognized that these unusual reverse payments are “quite different” from typical settlement agreements in that “a party with no claim for damages . . . walks away with money so it will stay away from the patentee’s market.” Slip Op. at 13. Accordingly, the Court concluded that such payments could, under certain limited circumstances, violate the antitrust Rule of Reason. In Actavis, the patent litigation “put the patent’s validity at issue, as well as its actual preclusive scope.” Slip. Op. at 8. Given this and other factors, “it would be incongruous to determine antitrust legality by measuring the settlement’s anticompetitive effects solely against patent law policy . . . .” Id. at 8-9.
Outside the peculiar context of the Hatch-Waxman Act, litigation over patent validity, and settlement agreements featuring reverse payments to stay away from a patentee’s market, there is simply no reason to question whether a licensing restriction within the scope of the patent grant could be an anticompetitive action under the antitrust laws.
What do you think?
In a brief, unanimous opinion written by Justice Kagan, the Supreme Court yesterday agreed with Monsanto that the patent exhaustion doctrine does not enable farmers to replant and reproduce patented seeds without the patentee’s permission. The Court emphasized the well-established rule that the doctrine restricts a patentee’s rights only as to the particular articles sold, and leaves untouched the patentee’s ability to prevent a buyer from making new copies of the patented item.
The Court did expressly note that its holding was limited – addressing the situation before it, rather than every one involving a self-replicating product. “In another case, the article’s self-replication might occur outside the purchaser’s control. Or it might be an incidental step in using the item for another purpose . . . . We need not address here whether or how the doctrine of patent exhaustion would apply in such circumstances.”
The decision likely has implications in other industries. For example, BSA/The Software Alliance filed a brief arguing that a contrary decision might “facilitate software piracy on a broad scale” because software can be easily duplicated. However, it also noted that a decision that went too in favor of protecting patent rights might unduly encourage nuisance software patent infringement suits.
The opinion, styled Bowman v. Monsanto Co., No. 11-796 (May 13, 2013), is available here.
Professor Michael Carrier has written a recent op-ed over at arstechnica suggesting that the answer is “yes.” Highlights:
“To start, [the antitrust agencies] can challenge concerning aggregations of patents . . . . [M]assive patent portfolios can be used offensively and can be valuable because of their size rather than the validity of each patent. These portfolios can have anticompetitive effects, including holdup, raised rivals’ costs, increased price, and reduced innovation.”
“The agencies could also promote transparency. Much troll activity today is hidden beneath a labyrinth of shell companies . . . . Given this, how could potential targets engage in licensing negotiations or evaluate patent portfolios? The agencies must be able to shine sunlight on this subterranean network, obtaining complete information from patent acquisitions, among other conduct, to determine competitive effects.”
“It seems particularly slippery for trolls to avoid promises made by their predecessors. The agencies could prohibit transfers to trolls that refuse to adhere to promises to keep licensing costs reasonable.”
The article discusses other ideas as well, and also suggests that Section 5 of the FTC Act could be used where “certain trolls have market power in technology (licensing) markets, do not offer non-trivial efficiencies, and cause competitive harm that results in higher prices or reduced innovation for consumers.”
(Note: some people prefer the term “patent assertion entities,” or PAEs, over the term “trolls.”)
Free Product Distribution or Discounted Component Distribution Likely Does Not Exhaust Patent Rights
In LifeScan, Inc. v. Shasta Technologies, LLC, 2013 U.S. Dist. LEXIS 38677 (N.D. Cal. Mar. 19, 2013), Judge Davila granted plaintiff’s motion for a preliminary injunction to address claims of patent infringement, and addressed whether patent exhaustion doctrine applies to free distribution of product or to discounted distribution of only one component of a product.
I previously covered patent exhaustion doctrine here. In a nutshell, the patent monopoly is exhausted after a patentee sells the patented invention in whole, or under certain circumstances, in part. (A license to use technology in a certain field of use, however, generally does not trigger the exhaustion doctrine, also known as the first sale doctrine.)
In LifeScan, the plaintiff markets and sells the “OneTouch Ultra System,” a glucose monitoring system. The system is composed of both a meter and disposable test strips. A patent covering “DoubleSure Technology” specifies a method designed to improve the reliability and accuracy of glucose measurements. The technology uses a self-testing strip design using multiple sensors.
Defendants made strips for use in the OneTouch Ultra System (thus prompting the patent suit), and argued that LifeScan’s patent rights were exhausted for two reasons. The court rejected each argument.
First, LifeScan has doctors distribute free OneTouch Ultra kits, comprised of meters and test strips, to diabetic patients. The court held – at least at the preliminary injunction stage – that LifeScan could likely show that this free distribution did not exhaust its patent rights. LifeScan receives no remuneration at the moment it parts with the patented invention. The fact that LifeScan distributes the kits in consideration of patients’ anticipated future repeat purchases of disposable test strips was not enough. According to the court, the common theme running through prior case law – which did not squarely address the issue before the court – was that there must be consideration at the time of the authorized sale in order for the patent exhaustion doctrine to attach.
Second, LifeScan sells OneTouch Ultra meters alone at a reduced price. But this practice too, the court held, likely does not trigger patent exhaustion, because the patent at issue is a method patent that requires both a meter and a test strip for an individual to practice it. “As such, the sale of the meter by itself does not necessarily convey the entire invention of the . . . patent to the purchaser, casting the applicability of exhaustion into doubt.”
The decision reaches the appropriate result – patent rights should not be lost merely because of a novel distribution system, one that is likely pro-competitive because it fosters dissemination of new technology.
According to this article in Law360 (may be behind a paywall), acting assistant attorney general Joseph Wayland recently warned at a conference that patent holders could get themselves into difficulties even if they are not trying to enforce standard-essential patents.
“I have made this a priority at the division … use or misuse of patents that goes beyond standard-essential patents,” Wayland said. “Let’s suppose that there are contractual terms that a holder of intellectual property has and insists that in order to license this patent you need to promise the following things, some of which may impact competition outside of that market or may lock in, attempt to lock in an advantage outside the expiration of the patent. Those are the kinds of things that might be of interest of us.”
Readers of this blog can read about patent / antitrust issues in other posts on, inter alia, the nine potential patent licensing no-nos. You can browse by category or use the search function to find them.
FTC May Expand Premerger Reporting Requirements to Include Pharmaceutical Patent Exclusive Marketing and Sales Licenses
Earlier this week, the FTC (in cooperation with the DOJ) announced that it is considering making changes to the premerger notification rules that would require pharmaceutical companies to make Hart-Scott-Rodino (HSR) filings for patent deals that grant exclusive marketing and sales rights to another company.
Apparently, the FTC has become concerned that where a licensor manufactures solely for the use of a licensee, and the licensee has exclusive marketing and sales rights, the transaction may be economically indistinguishable from one actually giving the licensee the exclusive right to manufacture. It thus proposes to focus the new rule on “all commercially significant rights”:
[I]n licensing arrangements in the pharmaceutical industry, the right to manufacture is far less important than the right to commercialize. In fact, the right to manufacture is often retained by the licensor who has the relevant manufacturing expertise and facilities. As a result, pharmaceutical companies often enter into licenses in which the licensee receives the exclusive right to use and sell under the license, but the licensor retains the right to manufacture exclusively for the licensee. As the licensor is manufacturing solely for the use of the licensee, this is substantively the same as giving the licensee the exclusive right to manufacture, use and sell the product(s) covered by the license.
The proposed rule would treat this kind of exclusive license agreement as a potentially reportable asset acquisition. This aspect of the rule is a significant change in the weight given to manufacturing rights in determining whether or not exclusive rights to a patent are being transferred. Under the proposed rules, if the licensor retains the right to manufacture exclusively for the licensee, it is a potentially reportable asset acquisition because all commercially significant rights, as discussed below, will still have passed to the licensee.
The FTC has in recent years taken a special interest in the pharmaceutical industry, and has been relatively hostile to so-called reverse patent settlements, where a pharmaceutical patentee settles patent litigation against a would-be generic manufacturer, and the generic manufacturer agrees to stay off the market for some time period in return for a cash payment. The FTC’s proposed HSR amendment, which is limited to the pharmaceutical industry, continues its efforts to pay special attention to pharmaceuticals.
It is not clear how many additional transactions will be reported if the amended rule goes into effect (the FTC itself estimates about 30 more per year). Comments to the proposed rule are due on or by October 25, 2012.
The Planetmoney folks have an interesting episode entitled “why it’s illegal to braid hair without a license.” The episode discusses the experience of one part-time African-style hair braider in Utah whose business was shut down by a state licensing board. The episode presents the viewpoint that over-licensing is often unnecessary, sometimes exclusionary, and interferes with the supply and movement of labor in the labor market (not necessarily a good thing in an economic downturn).
Some of these arguments are familiar, but one statistic in the episode caught my ear: some 50 years ago, only one out of 20 workers was licensed. Now, the statistic is one out of three.
I suspect that statistic defines “license” rather broadly (perhaps to include any sort of registration requirement). Nevertheless, it’s quite striking.
Here’s my take on the licensing system in the U.S. legal system.
I’ve now completed this series. For ease of reference, here is a list of all the posts.
Thanks for reading.