Category Archives: Infringement

Fair Use Ruling For Patent-Prosecution Firm’s Article Copying

Magistrate Judge Jeffrey Keyes recently issued a Report and Recommendation granting summary judgment of fair use in a case that involves a copyright infringement claim against a patent-prosecution firm. In the process of prosecuting patents for its clients, the firm copied several of the publishers’ copyrighted scientific journal articles from a USPTO database and other sources, and publishers sued for copyright infringement.

U.S. Magistrate Judge Keyes ruled that the firm’s copying constitutes fair use. This is the result urged by the USPTO, which intervened in the case. The court weighed each of the four fair-use factors, of § 107, (1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work. As to the first factor, the court concluded that the firm did not use the articles for the same purpose as the publishers. Regarding the second factor, the court reasoned that because the articles were primarily technical rather than creative, they were farther from the “core” of copyright protection. The third factor was the most interesting: even though the firm copied the entirety of each article, the court concluded that this factor still favored a finding of fair use because the copying was consistent with the purpose and character of the firm’s new and different use. As to the fourth factor, the court reasoned that publishers failed to show that the firm’s use of the articles to meet their PTO-disclosure obligations affected the traditional target market for the articles.

The meat of the court’s policy consideration is as follows:

Finally, Schwegman’s copying of the Articles and its use of those copies for the purpose of supporting its clients’ patent applications also “promote[d] the Progress of Science and useful Arts,” U.S. Const., art. I, § 8, cl. 8, which is the very purpose of the Copyright Act. Uses of copyrighted work that fulfill that purpose include “criticism, comment, news reporting, teaching . . ., scholarship, or research.” 17 U.S.C. § 107. Though they borrow from a copyrighted work, criticism, comment, news reporting, teaching, scholarship, and research all have the potential, under certain circumstances, to benefit the public by furthering the understanding of ideas or discoveries highlighted in a copyrighted work. And like each of these listed uses, Schwegman’s use of the Articles in connection with its clients’ patent applications confers a public benefit as well.

This is a case to watch. Because this ruling is a Report and Recommendation, the publishers have the right to seek review of it by filing an objection with the District Court judge. If the ruling stands, the legal community—not just patent-prosecution firms—will be the among the primary beneficiaries. Lawyers of all stripes have ethical duties that require them to duplicate documents that may be subject to copyright. This ruling provides some relief that these practices will not be necessarily be infringement.

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FTC v. Actavis: An Analysis

Editor’s note: This is part 4 of a 4-part series on FTC v. Actavis:  How Should the Supreme Court Rule on the Legality of Pay-for-Delay Settlements of Patent Disputes Litigated in the Shadow of the Hatch-Waxman Act? This series is adapted from a document that Professor Cotter coauthored while serving on ABA-Intellectual Property Law Section Task Force last fall.  See http://www.americanbar.org/content/dam/aba/administrative/intellectual_property_law/leadership/agendabook_nov2012.authcheckdam.pdf, pages 39-55.  The views expressed, however, are his own, and do not represent the views of the ABA or the Task Force.

In my view, the approach embodied in K-Dur strikes the right balance in terms of preserving patent incentives, on the one hand, and fulfilling the legislative mandate of the Hatch-Waxman Act and the antitrust goal of promoting competition, on the other.  A rebuttable presumption of illegality rightly places the burden on the settling parties to present evidence that the settlement promotes competition.  Allocating the burden of coming forward with such evidence to the settling parties makes sense, since they are likely to be better situated than anyone else to provide and substantiate such information if it exists.  At the same time, a rebuttable presumption of illegality avoids the risks inherent to a per se rule, which might condemn some reverse payment agreements that threaten little or no anticompetitive harm—for example when the amount of the payment is consistent with the patent owner’s desire to avoid litigation expenses or, as suggested in K-Dur, when the payment enables a cash-starved generic firm to remain in business.

Among the factors that should be relevant to the question of whether the settling parties have rebutted the presumption of illegality, the most important is the amount of consideration flowing from the brand-name to the generic firm.  Where that amount is less than the amount of the patent owner’s expected litigation costs, this fact alone may be sufficient to rebut the presumption, and thus shift to the antitrust plaintiff the burden of proving that the anticompetitive harm outweighs the procompetitive benefit of the settlement.  Under these circumstances, the payment may represent nothing more than a good-faith effort to avoid litigation costs; and the fact that payment flows from plaintiff to defendant may be attributable only to the unusual procedural posture of the Hatch-Waxman Act, which as noted permits patentees to file suit in advance of the defendant’s having marketed any product.  See Hovenkamp et al., supra, § 15.3a1(C), at 15-47 to -49.  Other relevant evidence may include the presence of other agreements between the settling parties (for example, authorizing the defendant to market an authorized generic drug, or licensing the defendant other intellectual property rights), which should be taken into account for the limited purpose of accurately estimating the value of the consideration flowing from plaintiff to defendant; whether the generic is “cash-strapped,” and therefore willing to accept a later entry date to remain in business; whether the patent owner sought, and succeeded in obtaining, a preliminary injunction against the generic manufacturer; whether the generic manufacturer agrees to waive its 180-day exclusivity, thus removing the risk of a bottleneck potentially blocking other ANDA applicants; and whether the patent in suit has withstood other validity challenges arising after the filing of the settled action.  See, e.g., Carrier, supra, at 378-82; Thomas F. Cotter, Refining the “Presumptive Illegality” Approach to Settlements of Patent Disputes Involving Reverse Payments:  A Commentary on Hovenkamp, Janis & Lemley, 87 Minnesota L. Rev. 1789, 1812-15 (2003).  On the other hand, where the amount of consideration flowing from patent owner to generic manufacturer exceeds the generic firm’s expected profit from the sale of the generic drug in question, the inference that the patent owner is simply paying a potential competitor to exit the market is much stronger, and the presumption of illegality should be very difficult to rebut.  Moreover, although it probably would not be advisable to require the factfinder to estimate the ex ante probability that the patent would have been found valid and infringed had the infringement action not been settled—a matter that courts in some of the reverse payment cases understandably have been reluctant to undertake—all that the proposed approach requires is for courts to draw appropriate inferences from the amount of the settlement in comparison to other expected costs and benefits, along with any other relevant facts and circumstances.

By contrast, the “scope of the patent” test embraced by the Second, Eleventh, and Federal Circuits appears to make it virtually impossible to condemn reverse payment settlements resulting in generic exclusion unless the parties overreach by agreeing to restraints on the sales of collateral products.  The amount of the reverse payments in cases such as Valley Drug ($123 million), Tamoxifen ($66.4 million), Ciprofloxacin and Arkansas Carpenters ($398 million), and Watson Pharmaceuticals (over $200 million) surely exceeded the patent owners’ avoided litigation costs many times over, see Elhauge & Krueger, supra, at 306-07, and thus should have raised serious questions concerning the settlements’ anticompetitive potential.  Indeed, the payments in Tamoxifen and Ciprofloxacin were each alleged to exceed the profit the generic manufacturers themselves expected to earn from sales of the generic drugs at issue over the relevant time period.  See Herbert Hovenkamp, Mark D. Janis, Mark A. Lemley & Christopher R. Leslie, IP and Antitrust, § 15.3a(B), at 15-37 n.133, 15-41 (2d ed. 2010).  In any other context, such agreements among competitors likely would be viewed as naked restraints of trade.  The fact that these cases involve patents does not change that fundamental conclusion:  as § 211 of the Patent Act itself expressly states, “Nothing in this chapter shall be deemed to convey to any person immunity from civil or criminal liability, or to create any defense to actions, under any antitrust law.”

Arguments that sometimes have convinced courts to apply the more lenient “scope of the patent” test are not persuasive.  First, although settlement generally is viewed as a positive good, antitrust law is replete with examples of patent settlements that were, rightly, understood as nothing more than disguised restraints on trade.  See Hovenkamp et al., supra, § 7.1a, at 7-3 (noting that “much of our legal doctrine concerning the permissible scope of licensing agreements was developed in cases in which the arrangements were undertaken in settlement of an IP dispute”).  Moreover, as the FTC Reports make clear, reverse payments are not necessary to induce settlement.  Most settlement agreements of pharmaceutical patent litigation do not contain reverse payment terms—although those that do contain such terms generate losses to consumers measured in the billions of dollars and therefore are a legitimate focus of antitrust scrutiny.  Second, any perceived administrative ease of applying a vague “scope of the patent” standard does not outweigh the courts’ responsibility to enforce the antitrust laws.  Third, while it may be possible to imagine situations in which risk aversion or asymmetric information could lead to substantial reverse payments notwithstanding an objectively high likelihood that the patent infringement action would have succeeded on the merits, scholars have doubted whether these considerations are likely to be common enough in reality to justify the countervailing anticompetitive risk.  See Jeremy Bulow, The Gaming of Pharmaceutical Patents, in 4 Innovation Policy and the Economy 145, 167-68 (Adam B. Jaffe et al. eds. 2004); Elhauge & Krueger, supra.  Fourth, a rebuttable presumption of invalidity does not undermine the statutory presumption of patent validity which, as the Third Circuit noted, only goes to the question of the infringement defendant’s burden of proof on the defense of validity.  As noted in the Introduction, between 40 and 50% of all litigated patents are invalidated, see John R. Allison & Mark A. Lemley, Empirical Evidence on the Validity of Litigated Patents, 26 AIPLA Q.J. 185, 205-07 (1998); Elhauge & Krueger, supra, notwithstanding the statutory presumption of validity; and in any event that presumption has nothing to do with the separate question of infringement, the burden of proving which always rests with the patent owner.  Finally, the effects on innovation of a rebuttable presumption of illegality are not likely to be substantial.  Plaintiffs with strong patents can still exclude competition during the statutory patent term—though to the extent there is a potential conflict between innovation and competition, Hatch-Waxman clearly reflects a legislative judgment to favor generic competition.  See K-Dur, 686 F.3d at 217-18; Hemphill, supra, at 1612-16.  The lenient approach to reverse payments evidenced in some of the cases tends to undermine that legislative judgment.  See Thomas Brom, Full Disclosure:  Dealing for Dollars, California Lawyer, Oct. 2012, at 18, 19 (quoting Senator Orrin Hatch as stating “As a coauthor, I can tell you that I find these type of reverse payment collusive arrangements appalling . . . .  We did not wish to encourage situations where payments were made to generic firms not to sell generic drugs and not to allow multisource generic competition.”); Sheryl Gay Stolberg & Jeff Gerth, Keeping Down the Competition:  How Companies Stall Generics and Keep Themselves Healthy, N.Y. Times, July 23, 2000 (quoting Congressman Henry Waxman as stating that “The law has been turned on its head”), available at http://www.nytimes.com/2000/07/23/us/keeping-down-competition-companies-stall-generics-keep-themselves-healthy.html.

In summary, in my view a rebuttable presumption of illegality makes the most sense for evaluating reverse payment settlements of patent infringement litigation conducted in the shadow of Hatch-Waxman.  The approach proposed above retains the ability to settle such litigation on other terms, and would enable courts in reverse-payment cases to consider potentially mitigating factors in evaluating the legality of specific agreements.

FTC v. Actavis: Case Law

Editor’s note: This is part 3 of a 4-part series on FTC v. Actavis:  How Should the Supreme Court Rule on the Legality of Pay-for-Delay Settlements of Patent Disputes Litigated in the Shadow of the Hatch-Waxman Act? This series is adapted from a document that Professor Cotter coauthored while serving on ABA-Intellectual Property Law Section Task Force last fall.  See http://www.americanbar.org/content/dam/aba/administrative/intellectual_property_law/leadership/agendabook_nov2012.authcheckdam.pdf, pages 39-55.  The views expressed, however, are his own, and do not represent the views of the ABA or the Task Force.

The case law has reflected different perspectives on the legality of pay-for-delay agreements.  Two early cases disapproved of them.  In Andrx Pharmaceuticals, Inc. v. Biovail Corp. Int’l, 256 F.3d 799 (D.C. Cir. 2001), the second ANDA applicant for a generic version of Cardizem CD argued that the first ANDA applicant’s agreement with the brand-name drug manufacturer to delay entry of the generic drug violated sections 1 and 2 of the Sherman Act.  Although the D.C. Circuit did not clearly articulate the level of antitrust scrutiny that would be appropriate for these types of agreements, the court reversed a district court judgment dismissing with prejudice the second ANDA applicant’s antitrust claim, stating that the settlement agreement “could reasonably be viewed as an attempt to allocate market share and preserve monopolistic conditions.”  Two years later, the Sixth Circuit held the pay-for-delay agreement that was at issue in Andrx to be per se illegal.  See In re Cardizem Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003).  One feature of the agreement in these two cases was that the brand-name manufacturer would stop making payments to the first ANDA applicant when the latter started marketing its generic drug.  Until the first ANDA applicant began marketing the drug, however, no one other generic manufacturer could do so either due to the 180-day exclusivity period, resulting in a bottleneck.

Other courts, however, developed more lenient standards for evaluating pay-for-delay agreements.  The Eleventh Circuit, first in Valley Drug Co. v. Geneva Pharmaceuticals, Inc., 344 F.3d 1294, 1311 & n.27 (11th Cir. 2003), and again in Schering-Plough Corp. v. FTC, 402 F.3d 1056, 1065-66 (11th Cir. 2005), adopted a standard—neither a per se rule nor a traditional rule of reason approach—that purports to take into account “the extent to which antitrust liability might undermine the encouragement of innovation and disclosure, or the extent to which the patent laws prevent antitrust liability for such exclusionary effects.”  Citing the benefits of settlement generally, and expressing a desire not to undermine the patent incentive, the court in both cases concluded that neither the presence nor the size of the payments flowing from the brand-name manufacturer to the generic manufacturer are necessarily indicative of anticompetitive effects.  Rather, as long as the agreement is within the scope of the patent’s exclusionary potential, the agreement does not violate the antitrust laws.  See Schering-Plough, 402 F.3d at 1066-76 (suggesting, however, that an agreement involving restraints on the sale of products not within the potential scope of the patent would be invalid under this approach); Valley Drug, 344 F.3d at 1308-13.  Similarly, the Second Circuit in In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187, 208-09 & n.22, 212-13 (2d Cir. 2006), held that pay-for-delay settlements are illegal only if the patentee is extending the scope of its patents or is engaging in fraud or sham litigation.  The Federal Circuit followed Tamoxifen in In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2009), and the Second Circuit itself reaffirmed the Tamoxifen approach in Arkansas Carpenters Health & Welfare Fund v. Bayer AG, 604 F.3d 98 (2d Cir. 2010), cert. denied, 131 S. Ct. 1606 (2011).  Yet more recently, the Eleventh Circuit equated its approach in Valley Drug and Schering-Plough with that of the Second Circuit in Tamoxifen and Arkansas Carpenters, stating that “absent sham litigation or fraud in obtaining the patent, a reverse payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.”  FTC v. Watson Pharmaceuticals, Inc., 677 F.3d 1298, 1312 (11th Cir. 2012), cert. granted, 133 S. Ct. 787 (2012) (No. 12-416).  Further, the court rejected the FTC’s argument that an allegation that the patentee was “not likely to prevail” in the underlying litigation sufficed to avoid a motion to dismiss, asserting that its previous “decisions focus on the potential exclusionary effect of the patent, not the likely exclusionary effect,” and that “the FTC’s retrospective predict-the-likely-outcome–that never-came-approach would also impose heavy burdens on the parties and courts.”  Id. at 1313-14.

Taking something of an intermediate view is the Third Circuit’s decision in In re K-Dur Antitrust Litigation, 686 F.3d 197 (3d Cir. 2012), pet’n for cert. filed, 81 U.S.L.W. 3090 (Aug. 24, 2012) (No. 12-245), pet’n for cert. filed, 81 U.S.L.W. 3090 (Aug. 29, 2012) (No. 12-265), a class action involving the same two agreements that were at issue in the Eleventh Circuit’s decision in Schering-Plough.  In K-Dur, the Third Circuit rejected the “scope of the patent” test, reasoning that neither the presumption of patent validity, see 35 U.S.C. § 282, which the court characterized as a “merely . . . a procedural device,” nor the judicial preference for settlement should “displace countervailing public policy objectives or . . . Congress’s 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.”  Id.  at 214, 217.    In place of the “scope of the patent” test, the court adopted “a quick look rule of reason analysis based on the economic realities of reverse payment settlement rather than the labels applied by the settling parties.”  Id.  Under this approach, “the finder of fact must treat any payment from a patent holder to a generic patent challenger who agrees to delay entry into the market as prima facie evidence of an unreasonable restraint of trade, which could be rebutted by showing that the payment (1) was for a purpose other than delayed entry or (2) offers some procompetitive benefit.”  Id.  As for the potential rebuttal evidence, the court suggested two possibilities.  First, the patent holder might be able to show that there was “no reverse payment because any money that changed hands was for something other than a delay in market entry.”  Id.  Second, the patent holder might be able to show “that the reverse payment offers a competitive benefit that could not have been achieved in the absence of a reverse payment,” for example where “a modest cash payment that enables a cash-starved generic manufacturer to avoid bankruptcy and begin marketing a generic drug might have an overall effect of increasing the amount of competition in the market.”  Id.

My own analysis follows in the next, final part of this series.

FTC v. Actavis: Reverse Payments

Editor’s note: This is part 2 of a 4-part series on FTC v. Actavis:  How Should the Supreme Court Rule on the Legality of Pay-for-Delay Settlements of Patent Disputes Litigated in the Shadow of the Hatch-Waxman Act? This series is adapted from a document that Professor Cotter coauthored while serving on ABA-Intellectual Property Law Section Task Force last fall.  See http://www.americanbar.org/content/dam/aba/administrative/intellectual_property_law/leadership/agendabook_nov2012.authcheckdam.pdf, pages 39-55.  The views expressed, however, are his own, and do not represent the views of the ABA or the Task Force.

Among the consequences of the Hatch-Waxman statutory framework described in my previous post are the following.

First, upon receiving notice of the Paragraph IV certification, the brand name manufacturer/patent owner has a powerful incentive to file a patent infringement action against the generic drug manufacturer in order to obtain the automatic 30-month stay.

Second, because the patent owner’s suit occurs prior to the generic manufacturer having sold any of its generic product to the public, the patent owner is not entitled to compensatory damages, in the form of lost profits or reasonable royalties, for past harms suffered as a result of the generic manufacturer’s technical infringement; at this point in time, no such harms have yet occurred.  This is quite different from the typical patent infringement lawsuit, in which the plaintiff files suit only after discovering that the defendant is making, using, or selling possibly infringing products.

Third, the brand name manufacturer’s profit margin on sales of branded drugs tends to be higher than the generic manufacturer’s expected profit margin on sales of the generic drug.  Economic logic suggests that, in the absence of generic competition, the brand-name manufacturer has the opportunity to derive monopoly profits from the sale of the branded drug (though subject to possible competition from other drug products that treat the same condition).  Following the entry of generic competition, the brand-name manufacturer can expect, at best, to compete as a duopolist.  Put another way, the brand-name manufacturer’s expected losses due to generic competition are likely to be greater than the generic manufacturer’s expected gains from selling the generic equivalent.  The empirical evidence appears consistent with this analysis.  See Federal Trade Commission, Pay-for-Delay:  How Drug Company Pay-Offs Cost Consumers Billions 8 (2010) [hereinafter FTC Report], available at http://www.ftc.gov/os/2010/01/100112payfordelayrpt.pdf (asserting that “in a mature generic market, generic prices are, on average, 85% lower than the pre-entry branded drug price”).

Fourth, if the parties settle the patent infringement suit prior to the date on which the generic manufacturer begins selling generic versions of the approved drug, the resulting settlement may take the form of a payment from the brand-name manufacturer to the generic manufacturer, in exchange for the latter’s promise not to market its generic drug until some date later than the date on which it would be entitled to market the generic drug if it prevailed at trial.  This consequence is both counterintuitive and controversial.

Reverse payment settlements are counterintuitive because, in the typical (non-Hatch-Waxman) patent infringement case, one would expect the defendant to pay the patent owner—and to agree either to exit the market or to license the patent in suit—in exchange for the patent owner’s agreement to dismiss the action.  The unusual posture under which patent litigation takes place in the shadow of Hatch-Waxman, however, results in the patent owner potentially having much more to lose from going forward with the suit than does the infringement defendant.  As noted above, if the patent owner were to lose the patent infringement suit, its lost profits would likely exceed the increased profits earned by the generic manufacturer from sales of its generic product.  Alternatively, even if the patent owner were to win, victory would come only after (at least) several months of litigation, with its attendant uncertainties (and attorney’s fees).  Under these circumstances, a rational response may be to settle the action on terms whereby the patent owner pays the generic manufacturer to exit the market for a period of time.

At the same time, reverse payment settlements are controversial because they appear to flout the general antitrust principle that a firm may not pay its competitors to exit the market.  Typically, an agreement between competitors whereby one of them agrees not to compete in a specific product or geographic market constitutes a per se violation of Sherman Act § 1.  See, e.g., Palmer v. BRG, Inc., 498 U.S. 46, 49 (1990); Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 768 (1984).  Nevertheless, there are some circumstances in which a reverse payment or pay-for-delay settlement of patent litigation conducted in the shadow of Hatch-Waxman can be benign.  A settlement whereby the patent owner agrees to pay the defendant some portion of the patent owner’s projected litigation expense savings resulting from avoiding trial, for example, in return for the latter’s agreement to exit the market for a period of time, probably should not give rise to antitrust liability, since the amount of consideration flowing from plaintiff to defendant is consistent with the plausibly neutral justification of merely avoiding litigation expenses.  In addition, in theory a reverse payment settlement could provide a means not only for avoiding litigation costs but also for reducing other risks, such as the defendant’s potential insolvency, or could reflect the parties’ different toleration for risk or asymmetric information in evaluating the likelihood of success at trial.  See, e.g., Thomas F. Cotter, Antitrust Implications of Patent Settlements Involving Reverse Payments:  Defending a Rebuttable Presumption of Illegality in Light of Some Recent Scholarship, 71 Antitrust L.J. 1069, 1073-74 (2004).

Nevertheless, it should be clear that reverse payment agreements also pose a substantial risk of being nothing more than an anticompetitive agreement to exclude competition.  Both the FTC, which has litigated several reverse payment cases under § 5 of the FTC Act, and the Antitrust Division of the Department of Justice, which has filed briefs in some of these cases, have expressed concern that applying an overly lenient standard of antitrust scrutiny to these agreements threatens substantial harm to consumer welfare.  Many of the nations’ most prominent antitrust scholars have expressed similar concerns.  See, e.g., Michael A. Carrier, Innovation for the 21st Century:  Harnessing the Power of Intellectual Property and Antitrust Law 370-82 (Oxford Univ. Press 2009) (arguing that reverse payment agreements should be presumptively illegal); Herbert Hovenkamp, Mark D. Janis, Mark A. Lemley & Christopher R. Leslie, IP and Antitrust § 15.3a1(C), at 15-47 to -49 (2d ed. 2010) (arguing that reverse payments should be presumptively illegal, but that the patent owner may rebut the presumption with evidence that, inter alia, the payment did not exceed expected litigation costs); Cotter, supra (arguing for presumptive illegality); Einer Elhauge & Alex Krueger, Solving the Patent Settlement Puzzle, 91 Texas L. Rev. 283 (2012) (arguing that reverse payments in excess of the patent owner’s anticipated litigation costs should be presumptively illegal); Scott Hemphill, Paying for Delay:  Pharmaceutical Patent Settlement as a Regulatory Design Problem, 81 NYU L. Rev. 1553 (2006) (arguing for presumptive illegality).  Indeed, a reverse payment settlement might seem particularly suspect if the consideration exceeds the amount the defendant could have expected to earn from marketing the generic drug over the relevant time period, or if the effect of the settlement is to create a bottleneck preventing other potential generic competitors from entering the market because the first applicant has not yet made use of its 180-date period of exclusivity.  Although amendments to the Hatch-Waxman Act enacted in 2003 were intended to prevent such “parking” of the 180-day period, it does not appear that those amendments eliminated the bottleneck problem altogether.  See Scott Hemphill, An Aggregate Approach to Antitrust:  Using New Data and Rulemaking to Preserve Drug Competition, 109 Colum. L. Rev. 629, 660-61 (2009).  More recently, a 2010 FTC Report estimated that, based on settlements filed with the FTC pursuant to terms of the 2003 Medicare Modernization Act, “[a]greements with compensation from the brand to the generic on average prohibit generic entry for nearly 17 months longer than agreements without payments,” and that “[p]ay-for-delay settlements . . . cost American consumers $3.5 billion per year—$35 billion over the next ten years.”  FTC Report, supra, at 2.

The case law on the legality of these payments varies, a topic covered in the next installment.

FTC v. Actavis: The Hatch-Waxman Framework

Editor’s note: This is part 1 of a 4-part series on FTC v. Actavis:  How Should the Supreme Court Rule on the Legality of Pay-for-Delay Settlements of Patent Disputes Litigated in the Shadow of the Hatch-Waxman Act? This series is adapted from a document that Professor Cotter coauthored while serving on ABA-Intellectual Property Law Section Task Force last fall.  See http://www.americanbar.org/content/dam/aba/administrative/intellectual_property_law/leadership/agendabook_nov2012.authcheckdam.pdf, pages 39-55.  The views expressed, however, are his own, and do not represent the views of the ABA or the Task Force.

One of Congress’s principal goals in enacting the Hatch-Waxman Act in 1984 was to speed up the entry of generic drugs into the marketplace.  In recent years, however, the structure of the Act has encouraged brand-name drug companies that own patents on FDA-approved drugs to settle patent infringement actions against generic drug companies seeking to market generic copies of brand-name drugs, pursuant to terms by which the brand-name drug company—the patent infringement plaintiff—pays the generic drug company—the infringement defendant—in exchange for the latter’s agreement not to market the generic drug until some date later than the date on which it would have been able to market the drug, had it prevailed in litigation.

These “reverse payment” or “pay for delay” agreements have generated a variety of responses among the courts, the enforcement agencies, and antitrust scholars and commentators.  In December 2012, the Supreme Court granted a petition for certioriari in one such case sub nomine Federal Trade Commission v. Actavis.  On March 25, 2013, the Court will hear oral argument on the question of whether “reverse-payment agreements are per se lawful unless the underlying patent litigation was a sham or the patent was obtained by fraud (as the court below held), or instead are presumptively anticompetitive and unlawful (as the Third Circuit has held).”  This blog series presents an overview of the “reverse payment” or “pay for delay” phenomenon, and argues that the Court should hold such agreements subject to a rebuttable presumption of illegality.

The intersection of patent law and of food and drug law is complex.  Typically, a manufacturer of brand-name drugs will obtain patent protection on a new compound prior to obtaining approval from the Food and Drug Administration (FDA) to market the drug to the public.  To obtain FDA approval, the brand-name manufacturer files an Investigational New Drug application and, eventually, a New Drug Application (NDA) setting forth the results of clinical studies demonstrating that the drug is safe and effective for its intended use.  This process often takes several years, and the Hatch-Waxman Act provides a means for brand-name drug manufacturers to obtain additional years of patent protection in order to make up for some of the time spent in obtaining FDA approval.  If the FDA approves the drug for marketing, the brand-name manufacturer lists the patent in the FDA’s “Orange Book.”

To speed up generic entry, the Hatch-Waxman Act permits a company that wishes to market a generic version of an approved drug to submit an Abbreviated New Drug Application (ANDA) demonstrating that its generic drug is bioequivalent to the approved drug.  The ANDA applicant may rely upon the clinical testing conducted by the NDA applicant to prove that the drug is safe and effective, without having to conduct its own round of tests.  See 35 U.S.C. § 355(j)(2)(A).  In addition, however, the ANDA applicant must certify that the generic drug will not infringe any valid patents covering the approved drug.  If there is an existing patent covering the approved drug listed in the Orange Book, the generic manufacturer files a “Paragraph IV” certification asserting that the patent is invalid or would not be infringed by the generic bioequivalent at issue. See id. § 355(j)(2)(A)(vii)(IV).  The generic manufacturer must notify the patent owner of the Paragraph IV filing.  See id. § 355(j)(2)(B).  Under these circumstances, although the generic manufacturer has yet to make, use, or sell the generic drug for commercial purposes, § 271(e)(2)(A) of the Patent Act authorizes the patent owner to file suit for infringement for what is sometimes referred to as the generic manufacturer’s “technical infringement.”  See 35 U.S.C. § 271(e)(2)(A).  Significantly, if the patent owner files suit within 45 days of receipt of the notice, the FDA may not approve the generic drug for marketing for 30 months from the receipt of notice, unless the patent expires first or the litigation terminates.  See id. § 355(j)(5)(B)(iii).  In addition, once the FDA approves an ANDA, the first ANDA applicant is entitled to 180 days of exclusive rights to market the generic version of the approved drug.  See id. § 355(j)(5)(B)(iv).

The ANDA process has led to reverse payments, discussed in the next installment.

Federal Circuit on Mootness: “We do not play dice.”

Like any gambling, betting on an appeal can be risky.

Allflex USA v. Avid Identification is an appeal from an declaratory-judgment action for unenforceability and non-infringement for six different patents related to RFID tags for pets. The district court made three rulings that Avid appealed: (1) that Avid “should be sanctioned” for not disclosing pending reexamination proceedings; (2) granting summary judgment of non-infringement, and (3) granting partial summary judgment after concluding that Avid’s failure to fully disclose prior public use and offers to sell one of its products was material to the inequitable conduct. Dice

Then the parties settled—sort of. The Federal Circuit explains:

By its terms, the agreement resolved all claims and issues between the parties other than those raised in this appeal. As part of the settlement agreement, Avid agreed to pay $6.55 million to Allflex. The parties further agreed that Avid would be free to appeal the three issues referred to above—[non-infringement, materiality of prior public use and offers, and the “should be sanctioned” ruling.] Avid also reserved the right to appeal the district court’s claim constructions and any other “underlying orders, objections, opinions, and rulings.” For its part, Allflex retained the right to contest any appeal on the merits, but the settlement explicitly barred Allflex from disputing the existence of a live case or controversy. The agreement further provided that, “[i]n the event AVID is successful in overturning any of such findings,” Allflex would pay Avid $50,000, i.e., the settlement amount to be paid to Avid would be reduced from $6.55 million to $6.5 million.

After the settlement, the district court entered a stipulated order, which dismissed the action with prejudice “with the exception of the following findings, which are final and ripe for appellate review.” The district court listed non-infringement, materiality, and sanctions as the issues ready for review.

Avid appealed and filed its opening brief. Allflex did not file a brief. Read the rest of this entry

Supreme Court: Already v. Nike is Moot.

Sometimes a party who is sued will voluntarily cease its objectionable conduct to end the lawsuit. That cessation, however, does not automatically moot the other party’s claim. City of Mesquite v. Aladdin’s Castle, Inc., 455 U.S. 283 (1982). The “voluntary cessation doctrine”  is, effectively, a presumption against mootness in these cases. The doctrine holds that the case is not moot unless the wrongful conduct “could not reasonably be expected to recur.” Friends of the Earth, Inc. v. Laidlaw Environmental Services (TOC), Inc., 528 U.S. 167 (2000).

The Supreme Court held that Nike met its burden to show that its objectionable conduct (i.e. enforcing an allegedly invalid trademark) would not recur by issuing a broad covenant not to sue. Nike’s covenant is now a Court-approved model for future defendants:

[Nike] unconditionally and irrevocably covenants to refrain from making any claim(s) or demand(s) . . . against Already or any of its . . . related business entities . . . [including] distributors . . . and employees of such entities and all customers . . . on account of any possible cause of action based on or involving trademark infringement, unfair competition, or dilution, under state or federal law . . . relating to the NIKE Mark based on the appearance of any of Already’s current and/or previous footwear product designs, and any colorable imitations thereof, regardless of whether that footwear is produced . . . or otherwise used in commerce before or after the Effective Date of this Covenant.

Already, LLC v. Nike Inc., 586 U.S. __, No. 11-982, 2013 WL 85300, *6.

IntellectualIP previously wrote about the cert grant.

Apple v. Samsung and awards of defendant’s profits: the potential for overcompensatory damages in design patent infringement cases

One aspect of the Apple v. Samsung litigation that has not received much coverage in the press is the basis of the jury’s $1.05 billion damages award.  According to an interview with the jury foreman, the jury award was based on the $8.16 billion in revenue Samsung earned from the sales of allegedly infringing devices, multiplied by the jury’s estimate of Samsung’s profit margin on those devices (somewhere between 12 and 13%).  See Dan Levine, Velvin Hogan, Foreman in Apple Samsung Case, Says Jury Didn’t Want $1 Billion Verdict To Be Just a Slap on the Wrist, Aug. 25, 2012.  Assuming that the numbers are supported by the evidence, this sort of award is permissible under design patent law.  (Three of the patents Samsung was found to have infringed were design patents.)  In this respect, however, U.S. design patent law is something of an oddity compared with other types of infringement cases, both in the U.S. and elsewhere.

In a case involving the infringement of a utility (invention) patent, the prevailing plaintiff has the option under section 284 of the U.S. Patent Act to recover its own lost profit resulting from the defendant’s infringing sales, or a reasonable royalty.  At one time, a third option—the recovery of the profit the infringer made from sales of infringing products, which depending on the circumstances could be higher than the plaintiff’s own lost profits or a reasonable royalty—also was available, but in 1946 Congress eliminated this option for utility patents on the ground that the calculation of the defendant’s profits was often too complex and time-consuming.  Congress did not eliminate this third option in design patent cases, however, where it remains today in section 289.  So this explains why Apple could request, and the jury could award, Samsung’s profits from sales of allegedly infringing products. Read the rest of this entry

Second Circuit rules that a TV-streaming company does not qualify as a “cable system” under the Copyright Act

Yesterday in WPIX v. ivi, the Second Circuit affirmed a preliminary injunction against ivi, Inc. and its CEO, prohibiting them from re-transmitting copyrighted cable TV programs.

ivi itself began the litigation. After receiving cease-and-desist letters, ivi filed suit in federal court in the Western District of Washington seeking declaratory relief. A week later, WPIX filed suit in New York; the Washington action was dismissed. ivi, Inc. v. Fisher Commc’ns, Inc., No. C10-1512JLR, 2011 WL 197419 (W.D. Wash. Jan. 19, 2011).

ivi’s defense relied almost entirely on § 111 of the Copyright Act. That section is an exception to the traditional rule that a copyright owner has exclusive broadcast rights. Section 111 permits a “cable system” to publicly transmit signals of copyrighted television programming to its subscribers, provided they pay royalties at government-regulated rates and abide by the statute’s procedures. ivi lost at the district court—which issued the injunction—and appealed. Read the rest of this entry

American Institute of Physics and John Wiley & Sons v. Schwegman Ludberg – First Battle Won by Copyright Owners

with co-author Kimberly Overholser, Student, St. Thomas Law School

In a copyright infringement case of significant importance, the first battle has been won by  publishers American Institute of Physics and John Wiley & Sons, Inc.  In February, the American Institute of Physics and John Wiley & Sons, Inc. filed suit against two law firms, including Minnesota patent prosecution firm Schwegman Lundberg & Woessner,  alleging copyright infringement. The publishers claim that the law firms infringed their copyrights by improperly copying journal articles for submission to the United States Patent and Trademark Office (USPTO) and for their own internal use.

The patent application process requires applicants to disclose prior art through information disclosure statements, inevitably leading to submission of journal articles.  Accordingly, the case has significant relevance to the patent bar.  Earlier this year the USPTO’s General Counsel released a memo stating the USPTO’s position that submission of copies of copyrighted materials to the USPTO as part of the patent application process is fair use under 17 U.S.C. 107.  Requiring a license from each journal would substantially hinder the patent process.  Although the office took no position on whether additional copies (i.e. for the law firm’s future reference) qualify as fair use. Plaintiff’s attorney Bill Dunnegan was quoted saying “The crux of what our case deals with is the internal copying by the law firms after they have one copy in their hand.”

The case has potential impact on the legal community as a whole, not just the patent bar.  If copying a journal article for submission to the USPTO constitutes infringement, wouldn’t copying the same article for submission to the court in support of a summary judgment constitute infringement?

Schwegman moved to dismiss the case, arguing that Plaintiffs had not sufficiently pleaded their claims. To avoid dismissal, a complaint must include “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 547 (2007). Predicating their motion on Twombly and Iqbal, Schwegman argued that the publishers had not pleaded sufficient facts to establish either element of copyright infringement: (1) ownership of a valid copyright and (2) copying of original elements of the copyrighted work.  The motion was denied.  The Court stated, “a plaintiff does not need to expressly plead facts to support the elements of a claim in the complaint, rather a plaintiff may rely upon plausible inferences from the well-pleaded facts to state a claim for relief.”

The publishers satisfied their pleading obligations by simply pleading ownership of the copyright, providing registration certificates for the journals, and by alleging Schwegman copied their protected works pursuant to Federal Rule of Civil Procedure 8(a)(2).

This is merely a warm-up for the real battle which lies ahead concerning the scope of the fair use defense.  The case continues under several watchful eyes.

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