Distribution, Competition, and Antitrust / IP Law

The Continuing Saga of Reverse Payment Patent Litigation

Lower generic drug costs

Lower generic drug costs (Photo credit: BC Gov Photos)

In FTC v. Watson Pharmaceuticals, Inc. (Supreme Court No. 12-416), the FTC unsurprisingly filed a merits brief this month again arguing that pay-for-delay (or “reverse payment”) patent settlements are presumptively anti-competitive.

These settlements often occur in connection with the Hatch-Waxman Act and patent lawsuits filed by a patent-owning pharmaceutical manufacturer against a would-be generic manufacturer. Following a patent lawsuit, the branded manufacturer will pay the generic compensation in return for the generic’s agreement to stay off the market for some period of time.  According to the FTC:

Given the significant difference between monopoly and competitive drug prices, a brand-name manufacturer has a strong economic incentive to induce its would-be generic competitor to forgo competition. And while the generic manufacturer will profit if it prevails in paragraph IV [Hatch-Waxman] litigation and enters the market, its profits will be much less than the brand-name manufacturer stands to lose. As a result, both the brand-name and generic manufacturers may benefit (at the expense of consumers) if the brand-name manufacturer agrees to share its monopoly profits in exchange for the generic manufacturer’s agreement to defer its own entry into the market.

FTC brief at 8-9. The FTC’s position is contra that of the Eleventh Circuit and mostly in line with that of the Third Circuit, which in In re K-Dur Antitrust Litigation, 686 F.3d 197, 214 (3d Cir. 2012), held that reverse payment agreements are subject to a “quick look rule of reason analysis” under which “any payment from a patent holder to a generic patent challenger who agrees to delay entry into the market [is] prima facie evidence of an unreasonable restraint of trade.” Id. at 218.

Oral argument is set for March 25.

I previously covered Watson and K-Dur.

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On the FTC-Google Settlement

Much has already been written about the specific terms of the settlement, so I will not attempt duplicate that effort. You can find the actual settlement here.  There is some interesting background /behind-the-scenes information on Google’s “antitrust escape” in this Wall Street Journal article.

In a nutshell, the settlement addressed three areas: (1) standard-essential patents (SEPs); (2) advertisers’ management of their ad campaigns; and (3) website “scraping.”

1. The settlement restricts Google (and its subsidiary, Motorola Mobility) from seeking injunctions on SEPs against potential licensees who are willing to enter into a license on fair, reasonable, and non-discriminatory (FRAND) terms. As a result, Google is generally prohibited from seeking injunctions for FRAND-encumbered SEPs. Although Google is allowed to seek injunctions in certain narrow situations—e.g., when a potential licensee refuses to enter into a license agreement on FRAND terms and is an “unwilling” licensee —the settlement outlines specific procedures that Google must follow when negotiating with potential licensees for its SEPs.

Practical result: The settlement reinforces the general rule that SEP owners may not seek injunctions. It also makes clear that potential licensees should pay particular attention to notices of alleged SEP infringement, because failure to respond could be interpreted as being an unwilling licensee.  However, the settlement’s complex license negotiation procedures may encourage opportunistic efforts to portray companies as “unwilling” licensees who can be enjoined.

2. Google agreed to remove restrictions on the use of its online search advertising platform, AdWords, that may make it more difficult for advertisers to coordinate online advertising campaigns across multiple platforms.

Practical result: Some advertisers may have at least a marginally easier time pursuing their advertising goals on non-Google platforms thanks to this commitment. However, it is not clear how robust the effects of the commitment will be.

3. Google committed to refrain from “scraping” the content of certain competing websites, passing the content off as its own, and threatening to de-list rivals entirely from Google’s search results if and when they protest about the alleged misappropriation of content. Websites will now have the ability to “opt out” of display on Google “vertical” properties (websites that focus on specific categories such as shopping or travel).

Practical result: Unclear, although arguably at least somewhat pro-competitive by removing a possible obstruction to innovation on the Internet.

The elephant in the room, however, is that although the Commission did investigate the central issue for many observers – allegations of so-called search algorithm bias favoring Google properties over others – the Commission’s settlement does not address this issue. Instead, the FTC “concluded that the introduction of Universal Search, as well as additional changes made to Google’s search algorithms – even those that may have had the effect of harming individual competitors – could be plausibly justified as innovations that improved Google’s product and the experience of its users. It therefore has chosen to close the investigation.”

Many observers think that the FTC missed the boat on this one.

The European Commission is still investigating Google’s search practices, and it may not be deterred by the FTC’s decision. EU competition law is generally more protective of competitors’ interests than U.S. law, which tends to focus more narrowly on competition itself and on consumer welfare. 

Rivals — including Microsoft, which owns search engine bing — are also not terribly impressed with the settlement, see the report in the linked article below.  Whether competitors, advertisers, or consumer classes attempt to bring their own challenges to alleged Google search engine bias remains to be seen.

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Supreme Court Grants Cert in Watson Pay-For-Delay Case

On December 7, 2012, the Supreme Court granted certiorari in FTC v. Watson Pharmaceuticals.  The Supreme Court is now poised to resolve the circuit split on the treatment of so-called “pay for delay” Hatch-Waxman Act patent litigation settlements.

The Second, Eleventh, and Federal Circuits have all allowed such settlements where they do not exceed the duration or scope of the patent (or involve sham litigation or fraudulently-obtained patents).  The Third Circuit has disagreed, finding that payments from patent-holding pharmaceutical manufacturers to generics to stay off the market are prima facie evidence of an antitrust violation.

You can find past blog entries on pay-for-delay issues and the Hatch-Waxman act by using the search feature.

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Direct Purchasers Can Bring Walker Process Claims

In Ritz Camera & Image v. SanDisk Corp., No. 2012-1183 (Fed. Cir. Nov. 20, 2012), the Federal Circuit held that direct purchasers have antitrust standing to bring Walker Process claims.

In a typical Walker Process claim, an alleged patent infringer claims that the patentee fraudulently obtained a patent or patents from the Patent and Trademark Office.  Usually the claim is brought as a type of monopolization claim.

In Ritz Camera, a direct purchaser of SanDisk products (not an alleged patent infringer) brought a Walker Process claim, alleging that by fraudulently obtaining patents, SanDisk was able to raise prices above competitive levels.  The Federal Circuit found that the plaintiff had antitrust standing.  “Ritz’s status as a direct purchaser gives it standing to pursue its Walker Process claim even if it could not have sought a declaratory judgment of patent invalidity or unenforceability.”

The ruling increases patentees’ potential exposure to antitrust claims arising out of patent prosecution and enforcement.

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The Case for Abolishing Patents?

Patented!!!

Patented!!! (Photo credit: @MSG)

This September 2012 paper issued under the auspices of the Federal Reserve Bank of St. Louis argues that patents should be abolished.  While they may initially promote innovation, “entrenched players like intellectual property lawyers who make their living filing lawsuits and old, established corporations that want to keep new players out of their markets lobby to expand the breadth of patent rights. And as patent rights get stronger, they take a serious toll on the economy, including our ability to innovate.”   See this short article in the Atlantic Monthly about the Fed paper.

Of course, the debate over the actual utility of patents — particularly software patents — is not new.  See this recent New York Times article.  But while some reforms are undoubtedly needed, abolishing all patents — particularly when other countries continue to protect IP through patents — seems like it might be throwing the baby out with the bath water and might lead to non-optimal outcomes in the U.S.

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DOJ Antitrust Head Cautions on Patent Risks

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.

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Is the Apple-Samsung Verdict Anti-Consumer?

I’ve shied away from writing about the Apple-Samsung patent verdict, in part because I don’t know the details of the patents involved or the evidence that went to the jury.  And so I offer no opinions on the specific patents.

However, this recent post by Randy Picker entitled “Apple v. Samsung: What Are Patents Good For?” and found on the University of Chicago Law School’s faculty blog seems spot on.  Randy makes the point that patents are inherently exclusionary.  They confer a negative monopoly — the right to exclude others.  As Randy writes, “[t]he only way to use a patent is to enforce it against someone else or to at least be able to threaten to do so, so that they will license rights from you.”

Randy goes on to talk about three “flavors” of the “we have too many patents” argument that has surfaced recently.  First is the “patent thicket” problem — many small patents are granted and an actual innovative product in the area needs access to all of them, but the issues only become apparent after the product has proven itself in the market and is subject to hold-up.  But this problem doesn’t really apply to Apple/Samsung.

Second is the argument that patents are supposed to induce R&D, but if relevant innovation would occur anyway, the patent isn’t really inducing anything meaningful.  And the third argument is closely related — that an invention’s reward is sufficiently large that society doesn’t need to reward its inventor with a new property right.  As Randy points out, we could try to run the patent system to take these notions into account, but we don’t, and so they really aren’t relevant to the Apple/Samsung verdict.

(My own view is that it’s much easier to talk about trying to take such notions into account than to actually do so.  How would the PTO or a court determine, for example, that a firm would have innovated anyway even if a patent were not issued?)

Randy concludes that Apple is a “hardcore” vertically integrated firm, producing and enforcing its IP rights against another very successful producing firm.  “We can undertake to revamp the patent system, and that could be within-patent reforms about the balance of utility patents and design patents or larger scale reforms that focus on the incremental incentives question, but given the system we have today, it isn’t at all surprising that an innovative firm like Apple holds patents that, by design, make it possible for Apple to block sales by competitors to eager customers. That is, after all, the point of the patent system in the first place.”

This general conclusion strikes me as entirely correct.

P.S. — for more about patent and R&D incentives in the context of patent tying and price discrimination, see my prior posts here and here.  My concluding thoughts on this issue are here.

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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.

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Third Circuit Rules that Reverse Patent Payment Agreements May Violate the Sherman Act

On Monday, in In Re: K-Dur Antitrust Litigation, No. 10-2078 (3rd Cir. July 16, 2012), the Third Circuit ruled that reverse patent payments (where a pharmaceutical product patentee pays a generic manufacturer to stay off the market for some period of time) are prima facie evidence of an antitrust violation. Under the Third Circuit’s “quick look rule of reason” standard, parties to reverse payment agreements can then rebut the evidence by showing either that the payment is pro-competitive or is for something other than delayed market entry.

The Third Circuit rejected the scope of the patent test, endorsed by courts including the Eleventh Circuit in FTC v. Watson Pharmaceuticals, Inc. (Under that test, if the settlement is even arguably within the scope of the patent, it is not subject to antitrust attack, absent sham litigation or fraud in obtaining the patent.) “The judicial preference for settlement, while generally laudable, should not displace countervailing public policy objectives or, in this case, Congress’ determination — which is evident from the structure of the Hatch-Waxman Act and the statements in the legislative record — that litigated patent challenges are necessary to protect consumers from unjustified monopolies by name-brand drug manufacturers,” the Third Circuit concluded.

The Third Circuit’s decision opens the door for possible review by the Supreme Court of a circuit split on the issue of reverse patent payments.

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Litigation Costs Are Monopolization Damages

In the ongoing Apple v. Samsung war, on June 30, 2012, Judge Lucy H. Koh of the Northern District of California denied Samsung’s bid for summary judgment on the basis that Apple had failed to offer any evidence of antitrust damages. 

(Apple alleges that Samsung violated a Fair, Reasonable and Non-Discriminatory (“FRAND”) obligation to license patents to a standard-setting organization and its members.  See the first related article link below.)

The court held that litigation expenses stemming directly from Samsung’s alleged anticompetitive behavior are recoverable as antitrust damages.  It also held that Apple’s limited amount of factual (non-expert) evidence of litigation expenses was sufficient to avoid summary judgment.

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