Recent developments on the patent/antitrust interface in the US
August 2021 | SPECIAL REPORT: COMPETITION & ANTITRUST
Financier Worldwide Magazine
August 2021 Issue
In the US, the patent/antitrust interface comes into play in three main areas: the improper acquisition of patent rights to create a monopoly, attempted enforcement of patent rights that have been obtained by fraud on the Patent Office, and the use of patent rights to obtain a greater reward than provided for by the law.
The first two of these are breaches of Section 2 of the Sherman Act’s prohibition on monopolisation and attempted monopolisation. The third may be a breach of Section 1 of the Sherman Act’s prohibition on agreements “in restraint of trade or commerce among the several States, or with foreign nations”. Enforcement of the law can be effected by the US Department of Justice (DoJ), the US Federal Trade Commission (FTC) or in private law suits by those who have suffered “an injury of the type the antitrust laws were intended to prevent and that flows from that which makes the defendants acts unlawful”.
The position of assistant attorney general heading the antitrust division of the DoJ and membership of the FTC are political appointments requiring nomination by the president and confirmation by the senate. Currently the antitrust division of the DoJ has an acting head who is a career member of the department pending a nomination of a new head by president Biden. The FTC is headed by five commissioners, nominated by the president and confirmed by the senate, each serving a seven-year term. No more than three commissioners can be of the same political party. Lina Kahn was sworn in as chairman on 15 June 2021 after being nominated by president Biden and confirmed by the senate.
During the Trump administration, the DoJ tended to have a ‘hands off’ approach to antitrust enforcement in the patent/antitrust enforcement arena as demonstrated by its intervention to oppose the FTC’s position in the case of FTC v. Qualcomm, where the Ninth Circuit Court of Appeals effectively agreed with the DoJ in finding that there had been no ‘antitrust injury’ caused by Qualcomm’s refusal to licence its patents on particular computer chips to competitors and its refusal to sell such chips to users unless they took a licence under Qualcomm’s patents covering the chips. It seems likely that the approaches of the two agencies will be more in harmony under the new administration.
Improper enforcement of patents
Because long-established case law, known as the Noerr-Pennington doctrine, provides that citizens have a general right to petition government and this includes petitioning the courts by bringing lawsuits, it is not normally an antitrust violation to institute a lawsuit even if this is done with an anticompetitive motive. There are, however, exceptions to this, including when the lawsuit is ‘sham litigation’ where the claim is objectively baseless and, in the patent field, when the patent has been obtained by fraud on the Patent Office.
An interesting example of the application of these principles is found in FTC v. Abbvie Inc, in which the Third Circuit Court of Appeals found that AbbVie’s litigation against one defendant (Teva) was not a sham, whereas its litigation against another defendant (Perrigo) was a sham and so gave rise to antitrust liability. The difference between the two situations was that in the suit against Teva it was found that Teva’s action was plausibly an infringement of the patent, whereas in the action against Perrigo amendments made to the patent application during its original examination by the Patent Office before the patent was granted made it clear that that “no reasonable litigant in AbbVie’s… position would believe it had a chance of winning the action” and so the action was objectively baseless.
The question of whether there was an antitrust violation in attempted enforcement of a patent allegedly obtained because of inequitable conduct by the applicant that could have amounted to 'fraud' during examination of the original application by the Patent Office is currently before appellate courts in two cases: Xitronix Corporation v. KLA Tencor Corporation and Chandler v. Phoenix Services LLC.
Alleged improper aggregation of patents
Intellectual Ventures LLC has acquired a reputation for purchasing patents and using them as swords against alleged users of the inventions in question rather than as shields to protect its own investment in developing a product or process. In Intellectual Ventures LLC v. Capital One Financial Corporation, Capital One alleged that infringement actions brought by Intellectual Ventures which had acquired a large patent portfolio and threatened patent infringement suits under them were acts of monopolisation or attempted monopolisation in breach of Section 2 of the Sherman Act and that such actions were in fact sham litigation. This theory was rejected at the district court level on the ground that any putative injury arose from threats of litigation not from the acts of acquiring the patents and so did not amount to an antitrust injury because no ‘relevant market’ in which monopolisation could have occurred had been identified and that Capital One had failed to establish that litigation brought against it was objectively baseless. The district court judge in Maryland did, however, comment that “it is hard to deny that there is something concerning from an antitrust perspective about the way in which IV engages in its licensing business”. In September 2019, the Federal Circuit let the lower court decisions stand.
On 25 February 2021, the Seventh Circuit heard oral argument in UFCW Local 1500 Welfare Fund et al. v. AbbVie Inc. et al., in which it is alleged that Abbvie created an unlawful “patent thicket” to protect its sales of Humira by obtaining so large a number of patents surrounding the patent that it became a practical impossibility to challenge all of them. The decision is still awaited.
Patent pools
It has long been recognised that patent pools have the potential for both good and bad in that on the one hand if the pool includes patents whose inventions complement each other, the pool can lead to efficiencies in licensing third parties, but in other cases combining patent rights in a pool could discourage research and development (R&D), new product development, and cost-reducing process innovations. Because of this, it has become common for participants in a proposed patent pool to request a Business Review Letter from the DoJ as to its views on the legality of the proposed pool.
An example of such a letter can be found in the DoJ Business Review Letter responding to a 14 August 2020 request by a group of 15 major universities with respect to a proposed patent pool which would, with a few exceptions, require them to licence patents, other than standards essential patents, in certain areas of technology only through the pool either as an individual patent or as part of a ‘portfolio’ or ‘bucket’ that had been organised to avoid including ‘substitute technologies’. Pricing would be standardised depending on the number of patents included in the licence. The DoJ viewed the efficiencies that resulted from these requirements and the increased licensing likely to result from them as outweighing any anticompetitive effect they might have. The DoJ can, however, require additional information before giving its reply.
Settlement of patent infringement suits involving ‘reverse payments’ from the patent owner to the alleged infringer
In 2013, in FTC v. Actavis the Supreme Court held that a practice that had developed of settling patent infringement suits between innovator pharmaceutical companies and generic drug makers whereby the innovator company made so-called ‘reverse payments’ to the generic manufacturer to delay its launch of a generic product for a specified period might involve an antitrust violation. However, the court declined to hold reverse payment settlements were presumptively unlawful because it recognised that there could be legitimate reasons for settling a patent infringement suit. The court noted that payments that are large and unjustified give rise to antitrust concerns.
Following the Actavis decision, the FTC has followed an active policy to try to curtail ‘reverse payments’ or ‘pay for delay’ settlements and its recent reports indicate that while settlements of patent disputes relating to small molecule drugs are increasing, the number of those including ‘pay for delay’ provisions are decreasing.
The first fully litigated case to reach an appellate court after Eli Lilly v. Actavis was Impax Laboratories Incorporated v. FTC. In this case, the Fifth Circuit upheld a decision of the FTC that a reverse payment “ultimately worth more than $100 million to delay the entry of [a] generic product [into the market] for more than two years”, which was still earlier than the expiration date of the patent, violated the antitrust laws. The value to the patent owner was the result not only of settling an infringement action in which the validity of the patent was challenged, thereby delaying the earliest date of entry of a generic into the market, but also using this period to effect a ‘product hop’ to a new patented formulation and withdraw the original product from the market. Consequently, state laws requiring substitution of ‘therapeutically equivalent’ generic versions of the brand-name drug when filling prescriptions were sidestepped because a generic version of the original drug was no longer the ‘therapeutic equivalent’ of the new product. The court noted surveys indicating average costs of patent litigation on pharmaceutical cases at the relevant date to be in the $5-10m range. Impax argued that although large, the settlement was not unjustified because had the patent been upheld, it would under the agreement have been allowed to enter the market earlier than would have been the case if it had been required to wait until the patent expired. The Court disagreed. The reverse payment settlement, therefore, threatened competition and it was necessary to consider whether the agreement had any pro-competitive effects or whether Impax could have secured any benefits it obtained from the agreement by a less restrictive agreement without a reverse payment for delayed entry. Focusing on the latter, the court found that the parties could have agreed on Impax being allowed to enter the market at an earlier date without a reverse payment. Consequently “the reverse payment settlement was an agreement to preserve and split monopoly profits that was not necessary to allow generic competition before the expiration of [the] patent. As a result, Impax agreed to an unreasonable restraint of trade.” The FTC was therefore justified in issuing a cease and desist order enjoining Impax from entering into similar reverse payment settlements going forward.
FTC’s modus operandi for challenging ‘reverse payment settlements’ will need to change
After the Supreme Court’s decision in Eli Lilly v. Actavis, the FTC was often successful in taking action to deal with reverse payment agreements by seeking disgorgement the sums paid using powers it was believed to derive from Section 13(b) of the Federal Trade Commission Act (15 USC 53(b)) which enables the FTC to seek an injunction to terminate unfair methods of competition. Section 5 of the FTC Act provides for the FTC to take action against acts of unfair competition by administrative proceedings and to issue cease and desist orders if a violation is found. Section 19 permits district courts to issue “such relief as the court finds necessary to redress injury to consumers” for breach of FTC rules or failure to comply with a cease and desist order if the act or practice to which the order relates is one which a reasonable man would have known under the circumstances was dishonest or fraudulent. Such relief had been held to include disgorgement of profits. Lower courts had also allowed this remedy as one that was ancillary to an injunction under Section 13(b). Use of Section 13(b) became a favoured tactic of the FTC because court cases were quicker than its own administrative proceedings. The institution of such suits in reverse payments cases therefore became common and the threat of disgorgement often led to settlement. On 22 April 2021 in the case of AMG Capital Management LLC v. FTC, the Supreme Court held that the remedies available under Section 13(b) were limited to seeking injunctions and prospective relief and did not include disgorgement of profits. To obtain such a remedy, the FTC must now first carry out its own administrative action and then seek a court order under Section 19. How this will affect the FTC’s ability to curtail reverse payment agreements remains to be seen.
John Richards is of counsel at Ladas & Parry LLP. He can be contacted on +1 (212) 708 1915 or by email: jrichards@ladas.com.
© Financier Worldwide
BY
John Richards
Ladas & Parry LLP
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