Category Archives: Invalidity

Fresenius USA, Inc. v. Baxter Intern., Inc. – Federal Circuit Decision Further Promotes Administrative Review of Patents

The Federal Circuit has ruled that a patent infringement judgment in excess of fourteen million dollars ($14,000,000.00) was rendered void and moot by a PTO decision invalidating the subject patent despite a prior Federal Circuit decision in the case affirming the validity of the patent.  Fresenius USA, Inc. v. Baxter Intern., Inc.— F.3d —-, 2013 WL 3305736 (C.A.Fed., July 2, 2013 (Cal.)) Coupled with the new broader scope and expedited administrative review provided for in the America Invents Act, the decision continues a trend of favoring or promoting administrative review of patents over district court litigation.

The decision will allow defendants to consider administrative challenges to the validity of a patent much further into the district court litigation process.  Prior to this ruling, prevailing wisdom was that a re-examination proceeding needed to be completed prior to the conclusion of district court proceedings to be useful.  A defendant who uncovers relevant prior art late in a proceeding may now be more likely to commence a re-examination proceeding as long as it can be completed prior to any appeals.

The decision raises interesting issues concerning separation of powers and the finality of judgments.  In a strongly worded and well-reasoned dissenting opinion, Judge Pauline Newman argued the decision improperly allows an administrative agency to void a final Federal Circuit Court of Appeals judgment.  Judge Newman wrote:

The court today authorizes the Patent and Trademark Office, an administrative agency within the Department of Commerce, to override and void the final judgment of a federal Article III Court of Appeals. The panel majority holds that the entirety of these judicial proceedings can be ignored and superseded by an executive agency’s later ruling.

The majority justified its decision on the grounds that the there was no “final” judgment. According to the majority, the prior decision affirming the validity of the patent was not final because the matter had been remanded solely to address post-judgment damage issues.  According to Judge Newman this position is inconsistent with well-established principals of finality:

The panel majority argues that the rules of finality do not apply here because the Federal Circuit, with its final judgment, included a remand to the district court to assess post-judgment damages. The courts of the nation have dealt with a variety of circumstances in which a final judgment included a remand to the district court. Here, all of the issues on appeal were finally adjudicated by the Federal Circuit; the remand authorized the district court to determine only post-judgment royalties. The remand had no relation to any issue in reexamination; validity had been finally resolved in the courts.

. . .The majority proposes that the final adjudication of patent validity can be redecided by the courts and thus by the PTO, because of the remand to assess post-judgment damages. This theory is contrary to the precedent of every circuit. All circuits impose finality and preclusion as to issues that were finally decided in full and fair litigation. . .

The America Invents Act contains certain procedural mechanisms which should prevent this from becoming a recurring concern.  Specifically, under the AIA: 1) Post Grant Review and Inter Partes Review will be prohibited if a civil action challenging the validity of the patent has been previously filed; and 2) a civil action challenging validity filed after the filing of either a Post Grant Review or Inter Partes Review petition will automatically be stayed (With the exception of “Covered Business Method Patents” these provisions are applicable only to patents issued from applications filed after March 16, 2013 (patents granted under the new “First Inventor to File” Rules).

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Five, six, or seven opinions in Alice Corp.: Little agreement on § 101

Circuit judges continue to differ regarding the test for patent subject-matter eligibility under 35 U.S.C. § 101. The en banc decision in CLS Bank v. Alice Corporation produced five, six, or seven opinions, depending on one’s counting. The breakdown of the various opinions authored in connection with the court’s ruling is as follows:

  1. Per curiam opinion.
  2. Judge Lourie authored a concurring opinion joined by Judges Dyk, Prost, Reyna, and Wallach.
  3. Chief Judge Rader concurred and dissented, both in part, joined by Judges Linn, Moore, and O’Malley, except as to part VI, joined only by the Chief Judge and Judge Moore.
  4. Judge Moore wrote an opinion dissenting in part, joined by the Chief Judge and Judges Linn and O’Malley.
  5. Judge Newman concurred and dissented, both in part. No judge joined that opinion.
  6. Judge Linn dissented, and was joined by Judge O’Malley.
  7. Chief Judge Rader, authored “additional reflections.”

Thus, depending on whether “additional reflections” are considered an opinion, and whether the one-paragraph per curiam opinion is considered an opinion, this case produced five, six, or seven opinions.  The per curiam opinions reads as follows:

Upon consideration en banc, a majority of the court affirms the district court’s holding that the asserted method and computer-readable media claims are not directed to eligible subject matter under 35 U.S.C. § 101. An equally divided court affirms the district court’s holding that the asserted system claims are not directed to eligible subject matter under that statute.

The judges sparred not only over the § 101 inquiry, but also regarding the precedential weight that should be afforded to any or all of the signed opinions that accompanied the ruling. Judge Lourie wrote that although

no single opinion issued today commands a majority, seven of the ten members, a majority, of this en banc court have agreed that the method and computer-readable medium claims before us fail to recite patent-eligible subject matter. In addition, eight judges, a majority, have concluded that the particular method, medium, and system claims at issue in this case should rise or fall together in the § 101 analysis.

Assuming that Marks applies to circuit courts, there may be rules of law to distill from the various opinions. See Marks v. United States, 430 U.S. 188, 193 (1977). Judge Rader’s opinion, however, suggests otherwise, noting that

[n]o portion of any opinion issued today other than our Per Curiam Judgment garners a majority. The court is evenly split on the patent eligibility of the system claims. Although a majority of the judges on the court agree that the method claims do not recite patent eligible subject matter, no majority of those judges agrees as to the legal rationale for that conclusion. Accordingly, though much is published today discussing the proper approach to the patent eligibility inquiry, nothing said today beyond our judgment has the weight of precedent.

So, not only is there disagreement regarding the proper test under § 101 (covered nicely at Patently-O here), the various opinions show a meta-disagreement, regarding weather any rule of law emerges from the court’s en banc determination. Stay tuned.

Preclusive Effect of TTAB Decisions: Always, sometimes, or never?

Last week a divided Eighth Circuit panel affirmed a district court’s conclusion that a TTAB decision would not be given preclusive effect in B&B Hardware, Inc. v. Hargis Industries, Inc. The court reasoned that preclusion was inappropriate because the TTAB decided different likelihood-of-confusion issues that those that were before the district court.

The dissenting judge disagreed that the TTAB’s likelihood-of-confusion analysis was truly different from the district court’s analysis, writing that “[m]odest differences in analytical approach to the same ultimate issue, however, do not justify dispensing with collateral estoppel.”

Some commentators have suggested there is now a circuit split regarding the preclusive effect of TTAB decisions. Perhaps there is, but the opinion was careful to avoid holding that TTAB decisions could never be preclusive. Consider these excerpts:

  • “The element at issue in this case is the second one—whether the issue sought to be precluded is the same as the issue involved in the prior action. It was not here, and thus the district court properly declined to apply issue preclusion in these circumstances.”
  • “[A]pplication of issue preclusion in this case is not appropriate, as the TTAB in denying registration did not decide the same likelihood-of-confusion issues presented to the district court in this infringement action.”
  • “Because the Trademark Trial and Appeal Board previously decided the same question about likelihood of confusion that was at issue in the trial of this case, Hargis Industries should not have been permitted to relitigate that point.” (Colloton, J. dissenting)

The Foreign Trademark Scam – Why (Oh Why) do We Tolerate this?

I hate it when this happens – a client comes up with a great trademark for a great product, everyone is really excited and then – the knockout search uncovers one of those stinking foreign based US trademark registrations with a list of goods and services that is the trademark equivalent of a 40 car pileup on the freeway at rush hour.  The identification covers 17 classes and is thousands and thousands of words long, and everyone knows that none of the goods and services have ever been, or will ever be, used in commerce in the US (I actually feel sorry for whoever has to examine these applications).  And, there is basically nothing anyone can do about it.  How does this happen?

Well, let’s go back to 1984. In Crocker Nat’l Bank v. Canadian Imperial Bank of Commerce, 223 U.S.P.Q. 909 (TTAB 1984), the Board went on record stating that a foreign applicant could obtain registration of a mark in the United States based on a foreign registration, even if the trademark has never been used anywhere in the world, and whether or not the applicant had a bona fide intention to use the trademark in the United States.  Wow – that’s a bargain if I ever did see one, especially since US applicants have to prove use before they can get a US registration.

This happens because many countries, including most European countries – unlike the US, do not have use based trademark systems.  This allows a person in those countries to obtain a trademark registration for any mark without any use of the mark.  In the EU, a Community Trademark registration creates property right in a mark without any requirement of a bona fide intention to use, without goodwill, or without any actual use of the mark anywhere, and these rights extend throughout the entire EU (subject to cancellation for non-use after five years).

This foreign trademark registration then can be used under Section 44/66 as the basis of a valid US trademark registration, and there is no requirement that the trademark be used in the US (at least not until the statement of continued use is due 6 years after registration).  That’s a 6-year free ride for foreign applicants, allowing them to put extremely broad registrations on record with the USPTO effectively blocking anyone from registering a confusingly similar trademark.

The Crocker decision, in large part due to the efforts of the predecessor of INTA, led the US to adopt an intent-to-use basis for trademark filing in 1988, which allowed for filing a trademark solely based on an intent-to-use the mark, and includes a requirement that all foreign applicants declare an intent-to-use the mark in the US.  Problem solved, right?  Well – not exactly.

Applicants filing in the US based on a foreign registration are required to state that they have a bone fide intent-to-use the mark in the US, but what does that really mean, and how is that enforced?  Intent-to-use generally only requires a good faith intention to eventually use the mark in a real and legitimate commercial sense.  It is not all that hard to “intend” to do something.  It is certainly nothing like actually doing that something.  I can intend to go to Mars, and without having to actually go to Mars , I don’t have much on the line.  It does not take much to cover your tracks, and show an intent-to-use.

So, what happens if there really was no intention to use the mark?  Keep in mind that when a trademark application filed in a country without a use or intent-to-use requirement is filed in the US with the same colossal list of goods and services that appeared in the foreign registration, it is reasonable to assume that there was no intent-to-use the mark in the US (since there was no intention to use required when the foreign application was filed).  Then, there should be some hope of invalidating the US filing?

In reality, there is not much that can be done.  The client can try and cancel the registration, but that is an awful lot to ask of someone at the name selection stage, and they would need to make the challenge based on the mere existence of a long list of goods and services in a foreign based application (it would be hard to have more evidence than that).  That may be too speculative of a basis for most people to take on the expense and burden of litigation (no matter how reasonable the basis).  Also, since the Federal Circuit’s In re Bose decision, which requires clear and convincing evidence of a material misrepresentation and an intent to deceive to prove fraud, it has become more or less impossible to invalidate an registration based on fraud.

There have been cases that have invalidated registrations based on a lack of a bone fide intent-to-use, however, these have been generally limited to cases against unsophisticated registrants or those that have been unable to produce any documentation at all of an intent-to-use.  As stated above, it is not hard to create some basic documentation of an “intention” to do something thereby clearing the intent-to-use hurdle.

Thus, the available options have serious limitations.  In reality, that vast majority of people in the situation I described at the outset are not in a position to do anything except select another mark, and what is most certainly an invalid trademark registration stays on the register.

The real solution to this problem is to require all applicants for a US trademark to produce evidence of use before obtaining a registration.  Additionally, to deal with the problem of absurdly long identifications maybe there should be requirement to provide a specimen for every distinct good and service rather than just one specimen per class (but don’t get me started on that).

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.

Can You Trademark Anything?

Apparently so.  After recently watching the movie Moneyball, I got to thinking about value in IP.  Trademarks, and in particular alternative trademarks, are the most undervalued and under-utilized form of IP protection.

Case in point, United States Trademark Registration No. 4,277,914 for the mark shown below:

apple store

The registration is owned by Apple and covers the design of an Apple Store, and issued on January 22nd.  That’s right – Apple trademarked the look of an Apple Store, and it really wasn’t that difficult.  They received an initial rejection on the grounds that the 3-dimensional store configuration was not inherently distinctive trade dress. (more…)

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.

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