November 15

Patents and Antitrust Enforcement – Is it time for a re-balance of rights?

The WSJ’s recent article on patents and antitrust regulation asks the question, “In an industry susceptible to monopolies, are companies abusing patent rights to stifle competition?” But maybe the question should be, “What is the proper balance between innovation and competition and how can we formulate the patent laws to achieve this balance?”

Patent Rights/Antitrust Enforcement

It is not the abuse of patent rights that stifles competition; it is the existence of patent rights that stifles competition, by design.  A patent grants a monopoly. It is the exclusive right to practice the invention for the life of the patent. It is inherently anticompetitive. That is the point. It is an incentive for inventors to create new products. It is a legal monopoly.

Contrary to the implied assumption of the WSJ’s question, the existence of a monopoly in itself may not necessarily be problematic or unlawful. There are “natural” monopolies, such as the first company in a new industry, and legally-created monopolies, such as patent rights.

The only a tension between patent rights and antitrust law is the one created by those who seek to limit the rights granted to patent-holders under the law, including (1)  antitrust regulators who seek to de-facto re-write the patent laws by devaluing the rights conferred on patent-holders and (2) those companies or individuals who seek to compete against the patent-holders.

If the rights provided by the patent laws are respected as written, they are a clear exception to any antitrust challenge.  If our society is going to continue to award patents as a means of encouraging innovation, a company should be able to develop or acquire patent rights (so long as the patents are obtained in good faith) without being required to license these rights to its competitors.

The Norvell Patents and Google’s Purchase of Motorola’s Patents

The question becomes complicated when groups of competitors align themselves together to acquire patent rights. For instance, CPTN Holdings LLC, a holding company owned equally by Microsoft Inc., Oracle Corp., Apple Inc. and EMC Corp., sought to acquire approximately 882 patents and patent applications from Norvell Inc. in connection with Norvell’s merger with Attachmate Corporation. In April, the Justice Department announced that the companies could only move forward with their plan to acquire the patents from Novell if the companies essentially agreed to make the patents available to their rivals via licensing agreements.

When announcing the revised deal, Sharis A. Pozen, Deputy Assistant Attorney General of the Justice Department’s Antitrust Division stated “To promote innovation and competition, it is critical to balance antitrust enforcement with allowing appropriate patent transfers and exercise of patent rights.”

It’s understandable that the antitrust regulators would be concerned about a group of competitors coming together to buy patent rights that they may or may not need for the transparent purpose of keeping those patent rights out of the hands of their competitors. It’s not a pro-competitive move. [This is not to say that I agree with the solution crafted by the Antitrust Division.]

But the Justice Department does not seem to be merely concerned with the fact that it was a group of competitors together acting to purchase patent rights. If this were its sole concern, it would not have opened an investigation in connection with Google’s $12.5 billion deal to purchase Motorola Mobility Holdings Inc. to bolster its own patent arsenal. The WSJ reports that the Justice Department’s inquiry is focused on “what Google intends to do with Motorola’s patents.”

This strikes me as an odd focus for the Antitrust Division. If Google had purchased a real estate holding company for the value of real estate held by it, it is unlikely that the division would be investigating. And, unlike real property, patent rights are not eternal.

Proper Balance?

The balance between innovation and competition is set in the patent law itself, which grants patents for a term of years. If that balance is off-kilter (for instance, if software patents should have shorter lifespans), the re-balancing should be done within the context of patent law. When, instead, the Justice Department uses its muscle to force companies to give up important patent rights that they bargained for in the name of antitrust law it makes the legal system more unpredictable and, thus, less efficient.

Thus, if we value predictability and efficiency in our laws (as I argue we should), there are a number of questions that should be asked and answered in connection with the interplay between patent rights and antitrust laws:

  • How important are patent rights in the software industry? Are they necessary to encourage innovation?
  • If we are concerned about encouraging more competition, should we require mandatory licenses on patents owned by companies with greater than a set percentage (say 60%) of a given industry?
  • Should the patent laws be re-written to allow for shorter patents on certain types of inventions, such as software?
  • Should the law clearly state that enforcing a patent or refusing to license a patent is not anticompetitive conduct?

In other words, the policies and likely outcomes should be considered and any policy change agreed to should be made in the law and applied equally to all patent-holders.

In the current environment, the Justice Department is making de-facto policy changes on a one-off basis.  And, somewhat ironically, the Justice Department is more likely to require patent-holders to license their patents in competitive industries as a direct of competitors’ complaints. For example, the WSJ article mentioned above notes that Barnes & Noble asked the Justice Department to open an antitrust probe in connection with Microsoft’s terms of licensing its patents. In industries with less competition, patent-holders may be more likely to be able to set the terms of their license agreements without concern about whether the Justice Department will require them to re-write their licensing agreements.

If you need assistance with antitrust issues, contact Rosanne at Felicello Law P.C.

September 9

The Risky Business of Product Innovation

If you develop a drug product, patent it, and bring it to market, are you required to continue to make it available for sale even if you have developed a better product to fill the same need? It depends on your reasons for bringing the new drug to market, your reasons for pulling the old drug from the market, and your means of converting the market to the new drug product. If you pull the drug from the market aggressively or even if you simply stop manufacturing it, you may be open to charges of anticompetitive conduct under the Sherman Antitrust Act. This is a result of the incongruous interplay between patent law, the federal laws related to pharmaceutical products, and state drug substitution laws.

Anti-competitive conduct & a monopolist’s duty to deal

Although the general rule of business in the United States is that a corporation (like a live person) may choose to do business with whatever other entities or people that it chooses, subject to specific regulations and discrimination laws, an entity that possesses monopoly power may have a duty to deal with its competition in certain instances. For example, the Supreme Court has ruled that a large ski lift operator in Aspen had a duty to continue to aid its rival ski lift operator by continuing to offer an all-Aspen ski pass because there the large operator had monopoly power and there was no consumer benefit or anticompetitive justification not to continue to offer the all-Aspen pass. See Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985).

Hatch-Waxman and state drug substitution laws

The Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Act”), codified at 21 U.S.C. §§ 355, 360cc and 35 U.S.C. §§ 156 [**8], 271, 282, provides the legal framework for the interaction of branded and generic drug manufacturers. To encourage generic drug companies to enter the market and drive the costs of drugs down, the Hatch-Waxman Act simplifies the FDA submission process for generic manufacturers, essentially allowing them to piggyback on the branded drugs application for FDA approval.

The generic drug manufacturer asks the FDA to rate its product “AB” to an existing branded product. An AB rating is given when the generic drug is bioequivalent to the branded product and also has the same form, dosage and strength. State drug substitution laws provide that AB-rated drugs may be automatically substituted for the branded drug product at the pharmacy unless the patient’s physician indicates that no substitution may occur.

Branded drug products as monopolies

In the realm of branded drug products and generic substitution laws, advocates for generic drug companies argue that branded drugs with patent protection are monopolies. Once they are labeled as monopolies, they may have a duty to deal with their rivals unless they can offer a valid business justification for refusing to deal. In the pharmaceutical context, the duty to deal may include the duty to keep your branded drug on the market so that the generic drug has a reference for automatic substitution. It means, essentially, handing your market over to your rivals.

Foreclosing the preferred generic business model as anticompetitive behavior

In Abbott Labs. V. Teva Pharms., the Delaware district court held that under a rule of reason analysis the court should weigh the benefits provided by the new product with the anticompetitive harm imposed by removing the prior formulation from the market. Abbott Labs. et al. v. Teva Pharmaceuticals USA, Inc. et al., 432 F. Supp. 2d 408, 422 (D. Del. 2006). But the court assumed away the alleged benefits of the product improvement. Instead, the court held that because the cost-efficient means of competing in the pharmaceutical drug market for generic drug companies is to provide generic substitutes to the original branded product, Abbott’s act of preventing that substitution by introducing a new product “is sufficient to support an antitrust claim.” Id. at 423. The District of Columbia has adopted a similar rule of reason analysis. United States v. Microsoft, 253 F.3d 34, 59, 346 U.S. App. D.C. 330 (D.C. Cir. 2001).

In contrast, the test applied most recently in district court in California is merely whether the new technology or product provides “sufficiently legitimate innovation” over the previous generation product. Allied Orthopedic Appliances, Inc. v. Tyco Healthcare Group L.P., 2008 U.S. Dist. LEXIS 112002, at *42, CV 05-06420 MRP (AJWx),Master Case, (C.D. Cal. July 9, 2008). If so, it cannot be the basis for an antitrust violation. Id.

Taken together, the case law suggests that the only risk-free approach for a branded drug manufacturer is to never remove an old version of its product from the market in the face of potential generic entry, even if the company has developed an improved version of this product. But this solution is not particularly appealing for branded companies or their investors because selling and marketing two separate versions of the same drug product leads to inefficiencies and potential market cannibalization. Thus, the incentives are skewed so that risk-adverse companies may choose not to develop improved versions of their drug products because they may be forced to compete with their own old product if they do so.

There is another, riskier option. Branded drug companies with an appetite for some risk of litigation may choose to slowly remove the old version of the branded drug product from the market after the market shows a preference for the new version. If a branded drug company decides to take this option, it should be careful to establish that the new version of the drug product offers a bona-fide improvement (not merely a window-dressing change), that there are business justifications for removing the old product from the market other than maintaining the ability to charge a monopoly price (i.e. risk of consumer confusion, consumer preference for the new product, etc.), and that the decision to remove the old version of the product from the market is not simply a reaction to the threat of generic entry.