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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Third Circuit Rules That Long-Term Agreements Featuring Market Share Rebates, Coupled With Other Exclusionary Behavior, Are Not Subject to a Price-Cost Screen

In ZF Meritor, LLC v. Eaton Corp., 2012 U.S. App. LEXIS 20342 (3d Cir. Sept. 28, 2012) (opinion available here), the Third Circuit ruled that long-term supply agreements predicated upon market share rebates or discounts should be evaluated under the Rule of Reason, rather than under the Brooke Group above-cost pricing test. As such, they can be exclusionary even if all of a defendant’s prices are above cost.

The defendant Eaton, a monopolist in the heavy-duty truck transmissions market, had entered into long-term supply agreements with all of the customers (OEMs) in the market. The agreements conditioned rebates on the purchase of a specified percentage of the OEMs’ requirements from Eaton.

The rebates did not reduce Eaton’s prices below cost, and Eaton argued that under a price-cost screen it therefore did not violate the antitrust laws. The Third Circuit conceded that predatory pricing principles, including the price-cost test, would control in cases solely presenting a challenge to pricing practices. “Moreover, a plaintiff’s characterization of its claim as an exclusive dealing claim does not take the price-cost test off the table . . . . [W]hen price is the clearly predominant mechanism of exclusion, the price-cost test tells us that, so long as the price is above-cost, the procompetitive justifications for, and the benefits of, lowering prices far outweigh any potential anticompetitive effects.”

However, the court declined to adopt Eaton’s “unduly narrow” characterization of the case as a “pricing practices” case, i.e., a case in which price is the “clearly predominant mechanism of exclusion.” The court noted other forms of exclusionary behavior, including (i) Eaton’s efforts to make itself the standard offering in the OEMs’ “data books” (which provided product information to end users); (ii) the removal of competitors’ products from two data books; (iii) preferential prices for Eaton products required by the long-term agreements; and (iv) evidence that Eaton’s continued compliance with the long-term agreements was also conditioned on the market penetration targets.

“Accordingly,” the Third Circuit concluded, “this is not a case in which the defendant’s low price was the clear driving force behind the customer’s compliance with purchase targets, and the customers were free to walk away if a competitor offered a better price . . . . Rather, Plaintiffs introduced evidence that compliance with the market penetration targets was mandatory because failing to meet such targets would jeopardize the OEMs’ relationships with the dominant manufacturer of transmissions in the market.”

In a long footnote, the Third Circuit distinguished its decision in LePage’s, while reaffirming its vitality. According to the ZF Meritor Court, LePage’s involved bundled product tying claims. “LePage’s is inapplicable where, as here, only one product is at issue and the plaintiffs have not made any allegations of bundling or tying. The reasoning of LePage’s is limited to cases in which a single-product producer is excluded through a bundled rebate program offered by a producer of multiple products, which conditions the rebates on purchases across multiple different product lines.”

The court went on to find that Eaton’s long-term contracts were, in fact, exclusionary and supported a finding of antitrust injury.

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You Can’t Try to Monopolize a Market In Which You Don’t Compete

That message was delivered, again, by the court in Infostream Group, Inc. v. PayPal, Inc., 2012 U.S. Dist. LEXIS 122255 (N.D. Cal. Aug. 28, 2012) (Illston, J), which dismissed antitrust claims against PayPal.

In Infostream, adult, “nontraditional” online dating services objected to PayPal’s refusal to deal with them, and alleged that PayPal’s contractual excuse was pretextual because PayPal was dealing with competitors such as Ashley Madison.com and ArrangementFinders.com. Plaintiffs alleged that PayPal has a monopoly in the “Confidential Payment Services” market and exercised its monopoly power in that market to injure competition in downstream markets, including the “Specialty Online Dating Services” market in which plaintiffs compete.

The problem for plaintiffs is that PayPal does not compete in the plaintiffs’ market. In Alaska Airlines, Inc. v. United Airlines, Inc., 948 F.2d 536 (9th Cir. 1991), the Ninth Circuit rejected monopoly leveraging doctrine as an independent theory of liability under the Sherman Act.

Although plaintiffs alleged that they had a “belief” that PayPal has an ownership interest in plaintiffs’ competitors, that allegation raised plausibility concerns under Iqbal and Twombly. Moreover, plaintiffs did not allege a dangerous probability of success in the downstream market, and in fact “wholly failed to allege any specific facts with respect to market power of their competitors . . . .”

The court gave plaintiffs leave to amend.

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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Northern District of California Reiterates That You Can Monopolize a Technology Market

Not every antitrust market is a physical product market.

In Apple, Inc. v. Samsung Electronics Co., Ltd., Case No. 11-CV-01846 (N.D. Cal. May 14, 2012) (Koh, J.), a patent case, the court refused to dismiss Apple’s counterclaims, including a Sherman Act § 2 counterclaim, against Samsung arising out of Samsung’s alleged manipulation of the mobile phone standard-setting process (which alleged resulted in the industry being “locked in” to technology owned and controlled by Samsung). The decision features three holdings of note:

  1. The court rejected Samsung’s argument that Apple had not pled a relevant antitrust market because it alleged monopolization of a technology market, and not a physical product market. Samsung’s argument that only physical product markets are cognizable was novel, but many courts have accepted technology markets as relevant markets. As have the DOJ and the FTC.
  2. The court also rejected Samsung’s argument that Apple had not adequately alleged market or monopoly power. Under Illinois Tool Works, of course, patents do not establish market power. But where a patent is incorporated into an industry standard, and where the standardization of the patented technology prevented the development of other proprietary technologies, the entity that caused the Standard Setting Organization (“SSO”) to adopt its technology may have market power, the court held.
  3. Finally, the court reiterated that an SSO can be used to obtain monopoly power and create anticompetitive effects on the relevant markets.  That can occur in a consensus-oriented private standard-setting environment, when a patent holder’s intentionally false promises to license essential proprietary technology on FRAND (fair, reasonable, and non-discriminatory) terms is coupled with the SSO’s reliance on that promise when including the technology in a standard, and the patent holder subsequently breaches that promise. Allegations of false FRAND commitments are subject to Federal Rule of Civil Procedure 9(b)’s heightened pleading standard, which Apple met.

Moral of the story: a robust and properly-framed SSO manipulation complaint can be difficult (though not impossible) to dismiss.

SanDisk’s Flash Memory Patent Licenses and Royalties Do Not Support Antitrust Claims

In PNY Technologies, Inc. v. SanDisk Corp., Case No. C-11-04689 YGR (April 20, 2012) (Gonzalez Rogers, J.), the court dismissed (with leave to amend) PNY’s antitrust claims against SanDisk Corp. The case again demonstrates the vital necessity of alleging exactly how a defendant dominates which market, and how its activity has allegedly harmed competition in each relevant market. Absent such allegations, complaints will fail.

At issue in the case is computer flash memory. Flash memory is developed by licensors of flash technology (such as SanDisk). Device manufacturers make the flash memory chips. “Aggregators” purchase component parts and assemble usable products. Finally, resellers purchase finished products for resale. SanDisk is vertically integrated, and both owns an extensive patent portfolio and produces its own branded consumer products.

PNY, an aggregator, challenged SanDisk’s licensing and royalty practices. It alleged that SanDisk used the specter of expensive and endless patent infringement litigation to coerce competitors into signing (under the guise of a settlement) its uniform, non-negotiable license, “which gives SanDisk control over the pricing of flash memory technology and products sold to its competitors and, ultimately, to consumers.” Specifically, PNY alleged that SanDisk required licensees to:

  1. Pay multiple royalties on the same product as it is sold downstream through the distribution chain;
  2. Pay a royalty on worldwide sales (including in countries where SanDisk does not have any patent rights);
  3. License an omnibus patent portfolio, rather than specific individual patents; and
  4. Grant back to SanDisk a worldwide, royalty-free cross-license to future flash memory-related technological innovations within the scope of the portfolio.

The court accepted that PNY had adequately alleged monopoly power and barriers to entry in the upstream market for flash memory technology. However, as to the downstream markets for flash memory devices, systems, and products, PNY failed to allege monopoly power. Its allegation that SanDisk uses licenses to extract a royalty on the same patented technology on all downstream market sales did not establish that SanDisk has the power to control downstream prices, so PNY had not directly alleged market power. Nor did PNY adequately allege that SanDisk had the power to exclude downstream competitors.

As to indirect proof of market power, PNY alleged a 40% share of retail sales of flash memory products, but did not allege SanDisk’s market shares in other downstream markets. This left PNY with, at most, an attempted monopolization claim of the retail market. However, because it did not allege barriers to entry and expansion in the retail market (as opposed to the technology market), it had no retail market attempt claim, either.

Finally, the court also found that PNY had not alleged anticompetitive conduct. As to the technology market, where SanDisk owns patents, the complaint did not allege any willful acquisition of a monopoly. As to the other downstream markets, the complaint did not clearly allege the collection of “double royalties” outside the patent exhaustion doctrine, but rather suggested SanDisk was enforcing its patent rights by collecting a separate royalty for separate sets of patent rights. The complaint also did not adequately allege that the grantback provision was anticompetitive, because PNY did not allege that the provision actually has stifled innovation. And as to the licensed patent portfolio, “[t]he fact that PNY entered into a form license over which SanDisk was able to negotiate more favorable terms does not constitute anticompetitive conduct for antitrust purposes.”

You Can’t Be a Price Predator When The Market Has Only One Buyer

This predator is looking for something other than low prices.

Under federal (U.S.) law, predatory pricing can be illegal — but establishing a predatory pricing violation can be quite difficult.  To do so requires proof of below cost pricing and a dangerous probability that the predator will recoup its losses following the predation period.

What happens when there is only one buyer in the marketplace?

That was the unusual fact pattern in GMA Cover Corp. v. Saab Barracuda LLC, No. 4:10-cv-12060-MAG-PJK (E.D. Mich. February 28, 2012).  There, both the plaintiff and the defendant sold stealth technology products to the military.  The plaintiff claimed that the defendant engaged in monopolization and attempted monopolization through predatory pricing.  In rejecting the claim, the court found that the plaintiff could not establish a dangerous probability of success.  The court noted that it could not find any cases addressing predatory pricing claims in which the market for the predatorily priced product contains a single (“monopsony”) buyer.  Nor, the court stated, had commentators addressed the unique situation.  Writing on a somewhat blank slate, the court wrote:

“[B]ecause the market for [stealth products] consists of a single purchaser — the United States Army — there is not a dangerous probability that [defendant] will be able to charge a supracompetitive price.  Even assuming that [defendant] achieved monopoly power, it would result in the market for [products] being a bilateral monopoly – a monopoly supplier dealing with a monopsony purchaser.  In such a situation, neither the monopoly supplier nor the monopsony purchaser can exercise monopoly power to set prices, because the other party can simply walk away from the transaction.”

Other features of the unusual market confirmed, in the court’s mind, the conclusion that there was no dangerous probability of supracompetitive price recoupment.

The case illustrates just how hard it is to prove anticompetitive price predation.  It is possible to do so — it is just very challenging.

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